Accounting for Not-for-Profit Organisation 1

LEARNING OBJECTIVES
After studying this chapter,
you will be able to;
T here are certain organisations which are set up
for providing service to its members and the
public in general. Such organisations include clubs,
• Identiy the need for, and
nature of accounting records
charitable institutions, schools, religious
relating to not-for-profit organisations, trade unions, welfare societies and
organisations; societies for the promotion of art and culture. These
• List the principal financial organisations have service as the main objective and
statements prepared by not- not the profit as is the case of organisations in
for-profit organisations and
explain their nature; business. Normally, these organisations do not
• Prepare the Receipt and undertake any business activity, and are managed
Payment Account from a by trustees who are fully accountable to their
given data; members and the society for the utilization of the
• Explain the procedure of funds raised for meeting the objectives of the
preparing the Income and
Expenditure Account from a organisation. Hence, they also have to maintain
given Receipt and Payment proper accounts and prepare the financial statement
Account and some which take the form of Receipt and Payment
additional information; Account; Income and Expenditure Account; and
• Distinguish between the Balance Sheet. at the end of for every accounting
Receipt and Payment
Account and the period (normally a financial year).
Income and Expenditure This is also a legal requirement and helps them
Account; to keep track of their income and expenditure, the
• Prepare Income and nature of which is different from those of the business
Expenditure Account and
Balance Sheet from a given
organisations. In this chapter we shall learn about
Receipt and Payment the accounting aspects relating to not-for-profit
Account and the relevant organisation.
additional information;
• Explain treatment of certain 1.1 Meaning and Characteristics of Not-for-Profit
peculiar items of receipts
and payments such as Organisation
subscriptions from members, Not-for -Profit Organisations refer to the
special funds, legacies, sale
of old fixed assets, etc. organisations that are for used for the welfare of the
society and are set up as charitable institutions

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2 Accountancy – Not-for-Profit Organisation and Partnership Accounts

which function without any profit motive. Their main aim is to provide service to a
specific group or the public at large. Normally, they do not manufacture, purchase or
sell goods and may not have credit transactions. Hence they need not maintain
many books of account (as the trading concerns do) and Trading and Profit and Loss
Account. The funds raised by such organisations are credited to capital fund or
general fund. The major sources of their income usually are subscriptions from their
members donations, grants-in-aid, income from investments, etc. The main objective
of keeping records in such organisations is to meet the statutory requirement and
help them in exercising control over utilisation of their funds. They also have to prepare
the financial statements at the end of each accounting period (usually a financial
year) and ascertain their income and expenditure and the financial position, and
submit them to the statutory authority called Registrar of Societies.

The main characteristics of such organisations are:

1. Such organisations are formed for providing service to a specific group or
public at large such as education, health care, recreation, sports and so on
without any consideration of caste, creed and colour. Its sole aim is to provide
service either free of cost or at nominal cost, and not to earn profit.
2. These are organised as charitable trusts/societies and subscribers to
such organisation are called members.
3. Their affairs are usually managed by a managing/executive committee
elected by its members.
4. The main sources of income of such organisations are: (i) subscriptions
from members, (ii) donations, (iii) legacies, (iv) grant-in-aid, (v) income
from investments, etc.
5. The funds raised by such organisations through various sources are
credited to capital fund or general fund.
6. The surplus generated in the form of excess of income over expenditure
is not distributed amongst the members. It is simply added in the
capital fund.
7. The Not-for-Profit Organisations earn their reputation on the basis of
their contributions to the welfare of the society rather than on the
customers’ or owners’ satisfaction.
8. The accounting information provided by such organisations is meant for
the present and potential contributors and to meet the statutory requirement.

1.2 Accounting Records of Not-for-Profit Organisations

As stated earlier, normally such organisations are not engaged in any trading
or business activities. The main sources of their income are subscriptions from
members, donations, financial assistance from government and income from
investments. Most of their transactions are in cash or through the bank. These

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Accounting for Not-for-Profit Organisation 3

institutions are required by law to keep proper accounting records and keep
proper control over the utilization of their funds. This is why they usually keep
a cash book in which all receipts and payments are duly recorded. They also
maintain a ledger containing the accounts of all incomes, expenses, assets
and liabilities which facilitates the preparation of financial statements at the
end of the accounting period. In addition, they are required to maintain a stock
register to keep complete record of all fixed assets and the consumables.
They do not maintain any capital account. Instead they maintain capital
fund which is also called general fund that goes on accumulating due to
surpluses generated, life membership fee, donation, legacies, etc. received
from year to year. In fact, a proper system of accounting is desirable to avoid
or minimise the chances of misappropriations or embezzlement of the funds
contributed by the members and other donors.
Final Accounts or Financial Statements: The Not-for-Profit Organisations are also
required to prepare financial statements at the end of the each accounting period.
Although these organisations are non-profit making entities and they are not required
to make Trading and Profit & Loss Account but it is necessary to know whether the
income during the year was sufficient to meet the expenses or not. Not only that
they have to provide the necessary financial information to members, donors, and
contributors and also to the Registrar of Societies. For this purpose, they have to
prepare their final accounts at the end of the accounting period and the general
principles of accounting are fully applicable in their preparation as stated earlier,
the final accounts of a ‘not-for-profit organisation’ consist of the following:
(i) Receipt and Payment Account
(ii) Income and Expenditure Account, and
(iii) Balance Sheet.
The Receipt and Payment Account is the summary of cash and bank
transactions which helps in the preparation of Income and Expenditure Account
and the Balance Sheet. Besides, it is a legal requirement as the Receipts and
Payments Account has also to be submitted to the Registrar of Societies along
with the Income and Expenditure Account, and the Balance Sheet.
Income and Expenditure Account is akin to Profit and Loss Account. The
Not-for-Profit Organisations usually prepare the Income and Expenditure
Account and a Balance Sheet with the help of Receipt and Payment Account.
However, this does not imply that they do not make a trial balance. In order to
check the accuracy of the ledger accounts, they also prepare a trial balance
which facilitates the preparation of accurate Receipt and Payment Account as
well as the Income and Expenditure Account and the Balance Sheet.
In fact, if an organisation has followed the double entry system they must
prepare a trial balance for checking the accuracy of the ledger accounts and it
will also facilitate the preparation of Receipt and Payment account. Income
and Expenditure Account and the Balance Sheet.

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4 Accountancy – Not-for-Profit Organisation and Partnership Accounts

1.3 Receipt and Payment Account

It is prepared at the end of the accounting year on the basis of cash receipts and
cash payments recorded in the cash book. It is a summary of cash and bank
transactions under various heads. For example, subscriptions received from the
members on different dates which appear on the debit side of the cash book, shall
be shown on the receipts side of the Receipt and Payment Account as one item
with its total amount. Similarly, salary, rent, electricity charges paid from time to
time as recorded on the credit side of the cash book but the total salary paid, total
rent paid, total electricity charges paid during the year appear on the payment
side of the Receipt and Payment Account. Thus, Receipt and Payment Account
gives summarised picture of various receipts and payments, irrespective of whether
they pertain to the current period, previous period or succeeding period or whether
they are of capital or revenue nature. It may be noted that this account does not
show any non cash item like depreciation. The opening balance in Receipt and
Payment Account represents cash in hand/cash at bank which is shown on its
receipts side and the closing balance of this account represents cash in hand and
bank balance as at the end of the year, which appear on the credit side of the
Receipt and Payment Account. However, if it is bank overdraft at the end it shall
be shown on its debit side as the last item. Let us look at the cash book of Golden
Cricket Club given in the example to show how the total amount of each item of
receipt and payment has been worked out.
Example 1
Golden Cricket Club
Cash Book (Columnar)
Dr. Cr.
Date Receipts L.F. Bank Office Date Payments L.F. Bank Office
Amount Amount Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)

2014 2014
April 1 Balance b/d 35,000 20,000 April 15 Insurance premium 15,000
April 10 Subscriptions 1,20,000 May 12 Printing and 10,750
stationery
April 10 Entrance fees 13,000 May 20 Postage and 430
May 20 Life membership 12,000 courier fees
fees June 16 Telephone 810
June 12 Locker rent 42,000 expenses
July 23 Life membership 8,000 July 10 Wages and salaries 22,000
fees July 15 Rates and Taxes 17,000
Aug. 20 Donation for 60,000 July 30 Govt. securities 1,00,000
building Aug. 13 Printing and 15,000
Sept. 13 Subscriptions 30,000 statienary
(2005-2006) Aug. 15 Postage and 480
Sept. 13 Subscription 45,000 courier service
Sept. 10 Lighting 12,250

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Accounting for Not-for-Profit Organisation 5

Sept. 14 Entrance fees 10,000 Sept 13 Telephone expenses 830

Nov. 9 Subscription 35,000 Oct. 1 Wages and salaries 10,000 12,000
Oct. 18 Printing and 13,000
Nov. 9 Subscription 10,000 stationary
(2009-2010) Oct. 31 Govt. securities 1,00,000
2015 Dec. 31 Wages and Salaries 22,000
Feb. 07 Subscription 25,000 2015
Jan. 21 Courier charges 240
Mar. 28 Interest on 18,000 Feb. 2 Telephone 960
government expenses
securities Mar. 10 Postage and 850
Courier fees
Mar. 27 Lighting 14,000
Mar. 27 Wages and Salaries 22,000
Mar. 31 Balance c/d 70,000 23,400
4,21,000 62,000 4,21,000 62,000

Part A
Item wise Aggregation of various Receipts
Subscriptions (2014–2015)
Date Amount (Rs.)
April 10, 2014 1,20,000
Sept. 13, 2014 45,000
Nov. 9, 2014 35,000
Feb. 7, 2015 25,000
Total 2,25,000

Subscriptions (2013–14)
Date Amount (Rs.)
Sept. 13, 2014 30,000
Total 30,000

Subscription
Date Amount (Rs)
Nov. 9, 2014 10,000
Total 10,000

Entrance Fees
Date Amount (Rs)
April 10, 2014 13,000
Sept.14, 2014 10,000
Total 23,000

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6 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Locker Rent
Date Amount (Rs)
April 12, 2014 42,000
Total 42,000

Life Membership fee

Date Amount (Rs)
May 12, 2014 12,000
July 23, 2014 8,000
Total 20,000

Donation for Buildings

Date Amount (Rs)
Aug. 20, 2014 60,000
Total 60,000

Interest on Government securities

Date Amount (Rs)
March 28, 2015 18,000
Total 18,000

Part B
Item wise Aggregation of various Payments
Insurance Premium
Date Amount (Rs)
April 15, 2014 15,000
Total 15,000

Printing and Stationery

Date Amount (Rs.)
May 12, 2014 10,750
Aug. 13, 2014 15,000
Oct. 18, 2014 13,000
Total 38,750

Lighting
Date Amount (Rs.)
Sept. 10, 2014 12,250
March 27, 2015 14,000
Total 26,250

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Accounting for Not-for-Profit Organisation 7

Telephone Expenses
Date Amount (Rs.)
June 16, 2014 810
Sept. 13, 2014 830
Feb. 12, 2015 960
Total 2,600

Rates and Taxes

Date Amount (Rs.)
July 15, 2014 17,000
Total 17,000

Government Securities
Date Amount (Rs.)
July 30, 2014 1,00,000
Oct. 31, 2014 1,00,000
Total 2,00,000

Wages and Salaries

Date Amount (Rs.)
July 10, 2014 22,000
Oct. 1, 2014 22,000
Dec. 31, 2014 22,000
March 30, 2015 22,000
Total 88,000

Postage and Courier Service

Date Amount (Rs.)
May 20, 2014 430
Aug. 15, 2014 480
Jan. 22, 2015 240
March 10, 2015 850
Total 2,000

The above data can also be shown in the form of the respective accounts in
the ledger. A detailed illustrative list of items of receipts and payments is given
in figure 1.

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8 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Figure 1

Receipts Payments

1. Donations 1. Purchase of Fixed Assets

(a) General 2. Purchase of Sports Material
(b) Specific purpose 3. Investment in Securities
2. Entrance Fees 4. Printing and Stationery
3. Legacies 5. Postage and Courier Charges
4. Sale of Investments 6. Advertisements
5. Sale of Fixed Assets 7. Wages and Salary
6. Subscriptions from Members 8. Honorarium
7. Life Membership Fees 9. Telephone Charges
8. Sale of old Newspapers 10. Electricity and Water Charges
9. Sale of Old Sports Material 11. Repairs and Renewals
10. Interest on Fixed Deposits 12. Upkeep of Play Ground
11. Interest/ Dividend on Investments 13. Conveyance Charges
12. Proceed from Charity Shows 14. Subscription for Periodicals
13. Sale of Scrap 15. Audit Fees
14. Grant-in-aid 16. Entertainment Expenses
15. Interest/Dividend on Specific 17. Municipal Taxes
Fund Investments 18. Charity
16. Miscellaneous Receipts. 19. Insurance
Receipt and Payment Account is given below:
Receipt and Payment Account for the year ending ————-
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d Balance b/d (Bank overdraft) xxx
Cash in Hand xxx Wages and Salaries xxx
Cash at Bank xxx Rent xxx
Subscriptions xxx Rates and Taxes xxx
General Donations xxx Insurance xxx
Sale of newspaper/ xxx Printing and Stationery xxx
periodicals/waste paper Postage and courier xxx
Sale of old sports materials xxx Advertisement xxx
Interest on fixed deposits Sundry expenses xxx
Interest/Dividend on general xxx Telephone charges xxx
investments Entertainment expenses xxx
Locker Rent xxx Audit fees xxx
Sale of scraps xxx Honorarium xxx
Proceeds from charity show xxx Repair and Renewals xxx
Miscellaneous receipts xxx Upkeep of ground xxx
Grant-in-aid** xxx Conveyance xxx
Legacies xxx Newspapers and Periodicals xxx
Specific Donations xxx Purchases of Assets xxx
Sale of Investments xxx Purchase of Investments xxx
Sale of Fixed Assets xxx Balance c/d xxx

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Accounting for Not-for-Profit Organisation 9

Life membership fees xxx Cash in hand xxx

Entrance fees xxx Cash at Bank* xxx
Receipts on account of xxx
specific purpose funds
Interest on specific funds' xxx
investments
Balance b/d (Bank Overdraft)* xxx
xxxxx xxxxx

Fig. 1.1: Format of Receipt and Payment Account

* There will be either of the two amounts i.e., each at bank or bank overdraft, not both.

It may be noted that the receipts side of the Receipt and Payment Account gives a
list of revenue receipts (for past, current and future periods) as well as capital receipts.
Similarly, the payments side of the Receipts and Payments Account lists the Revenue
Payments (for past, current and future periods) as well as Capital Payments.

1.3.1 Salient Features

1. It is a summary of the cash book. Its form is identical with that of simple
cash book (without discount and bank columns) with debit and credit
sides. Receipts are recorded on the debit side while payments are entered
on the credit side.
2. It shows the total amounts of all receipts and payments irrespective of
the period to which they pertain . For example, in the Receipt and Payment
account for the year ending on March 31, 2015, we record the total
subscriptions received during 2014–15 including the amounts related
to the years 2013–2014 and 2015-2016. Similarly, taxes paid during
2014–15 even if they relate to the years 2013–14 and 2015–2016.
3. It includes all receipts and payments whether they are of capital nature
or of revenue nature.
4. No distinction is made in receipts/payments made in cash or through
bank. With the exception of the opening and closing balances, the total
amount of each receipt and payment is shown in this account.
5. No non-cash items such as depreciation outstanding expenses accrued
income, etc. are shown in this account.
6. It begins with opening balance of cash in hand and cash at bank (or
bank overdraft) and closes with the year end balance of cash in hand/
cash at bank or bank overdraft. In fact, the closing balance in this
account (difference between the total amount of receipts and payments)
which is usually a debit balance reflects cash in hand and cash at bank
unless there is a bank overdraft.

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10 Accountancy – Not-for-Profit Organisation and Partnership Accounts

1.3.2 Steps in the preparation of Receipt and Payment Account

1. Take the opening balances of cash in hand and cash at bank and enter
them on the debit side. In case there is bank overdraft at the begining of
the year, enter the same on the credit side of this account.
2. Show the total amounts of all receipts on its debit side irrespective of
their nature (whether capital or revenue) and whether they pertain to
past, current and future periods.
3. Show the total amounts of all payments on its credit side irrespective of
their nature (whether capital or revenue) and whether they pertain to
past, current and future periods.
4. None of the receivable income and payable expense is to be entered in
this account as they do not involve inflow or outflow of cash.
5. Find out the difference between the total of debit side and the total of
credit side of the account and enter the same on the credit side as the
closing balance of cash/bank. In case, however, the total of the credit
side is more than that of the total of the debit side, show the difference on
the debit as bank overdraft and close the account.
From the following information based on the data assimilated from the cash
book given in example 1, at page 4, the Receipt and Payment Account of Golden
Cricket Club for the year ended on March 31, 2015 will be prepared as follows:
Summary of Cash Book
Details Amount
(Rs.)
Cash in hand as on April 1, 2014 20,000
Cash at bank as on April 1, 2014 35,000
Subscription: Rs.
2013-14 30,000
2014-15 2,25,000
2015-16 10,000 2,65,000
Donation for Building 60,000
Entrance fees 23,000
Life membership fee 20,000
Printing and Stationery 38,750
Lighting 26,250
Rates and Taxes 17,000
Telephone charges 2,600
Postage and courier 2,000
Wages and Salaries 88,000
Insurance Premium 15,000
Interest on government securities 18,000
Locker rent 42,000
Purchase of government securities 2,00,000
Cash in hand as on March 31, 2015 23,400
Cash at bank as on March 31, 2015 70,000

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Accounting for Not-for-Profit Organisation 11

Receipt and Payment Account for the year ending March 31, 2015
Dr. Cr.
Receipts Amount Payments Amount
(Rs.) (Rs.)
Cash in hand as on 20,000 Printing and Stationery 38,750
April 1, 2014 Lighting 26,250
Cash at bank as on 35,000 Rates and Taxes 17,000
April 1, 2014 Telephone charges 2,600
Subscription: Postage and Courier 2,000
2013–14 30,000 Wages and Salaries 88,000
2014–15 2,25,000 Insurance Premium 15,000
2015–16 10,000 2,65,000 Purchase of govt. securities 2,00,000
Donation for building 60,000 Cash in hand as on 23,400
Entrance fees 23,000 March 31, 2015
Life membership fee 20,000 Cash at bank as on 70,000
Interest on investment in 18,000 March 31, 2015
Government securities
Locker rent 42,000
4,83,000 4,83,000

Illustration 1
From the following particulars relating to Silver Point, prepare a Receipt and
Payment account for the year ending March 31, 2015.
Particulars Amount Particulars Amount
(Rs.) (Rs.)

Opening cash balance 1,000 Sale of old sports materials 1,200

Opening bank balance 7,200 Donation received for pavilion 4,600
Subscriptions collected for: Rent paid 3,000
2013-14 Rs. 500 Sports materials purchases 4,800
2014-15 Rs. 7,600 Purchase of refreshments 600
2015-16 Rs. 900 9,000 Expenses for maintenance 2,000
Sale of refreshments 1,000 of tennis court
Entrance fees received 1,000 Salary paid 2,500
Tournament expenses 2,400
Furniture purchased 1,500
Office expenses 1,200
Closing cash in hand 400

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12 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Solution
Books of Silver Point
Receipt and Payment Account
for the year ending March 31, 2015
Dr. Cr.
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d Rent 3,000
Cash 1,000 Sports materials purchased 4,800
Bank 7,200 Purchase of refreshments 600
Subscriptions Maintenance expenses for 2,000
2013-14 500 tennis court
2014-15 7,600 Salary 2,500
2015-16 900 9,000 Tournament expenses 2,400
Sale of refreshments 1,000 Furniture purchased 1,500
Entrance fees 1,000 Office expenses 1,200
Sale of old sports materials 1,200 Balance c/d
Donation for pavilion 4,600 Cash 400
Bank (balancing figure) 6,600
25,000 25,000

1.4 Income and Expenditure Account

It is the summary of income and expenditure for the accounting year. It is just
like a profit and loss account prepared on accrual basis in case of the business
organisations. It includes only revenue items and the balance at the end
represents surplus or deficit. The Income and Expenditure Account serves
the same purpose as the profit and loss account of a business organisation
does. All the revenue items relating to the current period are shown in this
account, the expenses and losses on the expenditure side and incomes and
gains on the income side of the account. It shows the net operating result in
the form of surplus (i.e. excess of income over expenditure) or deficit (i.e. excess
of expenditure over income), which is transferred to the capital fund shown in
the balance sheet.
The Income and Expenditure Account is prepared on accrual basis with the
help of Receipts and Payments Account along with additional information
regarding outstanding and prepaid expenses and depreciation etc. Hence, many
items appearing in the Receipts and Payments need to be adjusted. For example,
as shown in Example 1, (Page No. 10) subscription amount of Rs.2, 65,000 received
during the year 2014-15 appearing on the receipts side of the Receipt and Payment
Account includes receipts for the periods other than the current period. But the
subscription amount of Rs. 2,25,000 pertaining to the current year only will be
shown as income in Income and Expenditure Account for the year 2014-15.

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Accounting for Not-for-Profit Organisation 13

1.4.1 Steps in the Preparation of Income and Expenditure Account

Following steps may be helpful in preparing an Income and Expenditure Account
from a given Receipt and Payment Account:
1. Persue the Receipt and Payment Account thoroughly.
2. Exclude the opening and closing balances of cash and bank as they
are not an income.
3. Exclude the capital receipts and capital payments as these are to be
shown in the Balance Sheet.
4. Consider only the revenue receipts to be shown on the income side of
Income and Expenditure Account. Some of these need to be adjusted by
excluding the amounts relating to the preceding and the succeeding
periods and including the amounts relating to the current year not yet
received.
5. Take the revenue expenses to the expenditure side of the Income and
Expenditure Account with due adjustments as per the additional
information provided relating to the amounts received in advance and
those not yet received.
6. Consider the following items not appearing in the Receipt and Payment
Account that need to be taken into account for determining the surplus/
deficit for the current year :
(a) Depreciation of fixed assets.
(b) Provision for doubtful debts, if required.
(c) Profit or loss on sale of fixed assets.
Now you will observe how the income and expenditure account is prepared
from the receipts and payments account given in example 1, on page 10.
Income and Expenditure Account
for the year ending on March 31, 2015
Dr. Cr.
Expenditure Amount Income Amount
(Rs.) (Rs.)
Printing and Stationery 38,750 Subscriptions 2,25,000
Lighting 26,250 Entrance fees 23,000
Rates and Taxes 17,000 Interest on investment 18,000
Telephone charges 2,600 in government securities
Postage and courier charges 2,000 Locker rent 42,000
Wages and Salaries 88,000
Insurance Premium 15,000
Surplus (Excess of income 1,18,400
over expenditure)
3,08,000 3,08,000

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14 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Note that-
1. Opening and closing cash/bank balances have been excluded.
2. Payment for purchase of Government securities being capital expenditure has
been excluded.
3. Amount of subscriptions received for the year 2013-14 and 2014-15 have been excluded.
4. Life membership fee is an item of capital receipt and so excluded.
5. Donation for building is a receipt for a specific purpose and so excluded.
Illustration 2
From the Receipt and Payment Account given below, prepare the Income and
Expenditure Account of Clean Delhi Club for the year ended March 31, 2014.

Receipt and Payment Account for the year ending March 31, 2014
Dr. Cr.
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 3,200 Salary 1,500
(Cash in hand) Rent 800
Subscriptions 22,500 Electricity 3,500
Entrance Fees 1,250 Taxes 1,700
Donations 2,500 Printing and Stationery 380
Rent of hall 750 Sundry expenses 920
Sale of investments 3,000 Books purchased 7,500
Govt. bonds purchased 10,000
Fixed deposit with bank 5,000
(on 31.03.2014)
Balance c/d
Cash in hand 400
Cash at bank 1,500 1,900
33,200 33,200

Solution
Books of Clean Delhi Club
Income and Expenditure Account for the year ending March 31, 2014
Dr. Cr.
Expenditure Amount Income Amount
(Rs.) (Rs.)
Salary 1,500 Subscriptions 22,500
Rent 800 Entrance fees 1,250
Electricity 3,500 Donation 2,500
Taxes 1,700 Rent of hall 750
Printing & Stationery 380
Sundray Expenses 920
Surplus 18,200
(excess of income over
expenditure)
27,000 27,000

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Accounting for Not-for-Profit Organisation 15

Illustration 3
From the following Receipt and Payment Account for the year ending March 31,
2015 of Negi's Club, prepare Income and Expenditure Account for the same
period:
Receipt and Payment Account for the year ending March 31, 2015
Dr. Cr.
Expenditure Amount Income Amount
(Rs.) (Rs.)
Balance c/d Bank 25,000 Purchase of furniture (1.7.14) 5,000
Subscriptions Salaries 2,000
2014 1,500 Telephone expenses 300
2015 10,000 Electricity charges 600
2016 500 12,000 Postage and Stationery 150
Donation 2,000 Purchase of books 2,500
Hall rent 300 Entertainment expenses 900
Interest on bank deposits 450 Purchase of 5% government 8,000
Entrance fees 1,000 papers (1.7.14)
Miscellaneous expenses 600
Balance c/d:
Cash 300
Bank 20,400
40,750 40,750

The following additional information is available:

(i) Salaries outstanding – Rs. 1,500;
(ii) Entertainment expenses outstanding – Rs. 500;
(iii) Bank interest receivable – Rs. 150;
(iv) Subscriptions accrued – Rs. 400;
(v) 50 per cent of entrance fees is to be capitalised;
(vi) Furniture is to be depreciated at 10 per cent per annum.

Solution
Books of Negi's Club
Income and Expenditure Account for the year ending 31.3.2015
Dr. Cr.

Expenditure Amount Income Amount

(Rs.) (Rs.)
Salaries 2,000 Subscriptions 10,400
Add: Outstanding 1,500 3,500 Donation 2,000
Telephone expenses 300 Entrance Fees (50% of Rs. 1,000) 500
Electricity charges 600 Bank interest 450
Postage and Stationery 150 Add: Outstanding interest 150 600

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Entertainment expenses 900 Interest on investment 200

Add: Outstanding 500 1,400 Hall rent 300
expenses
Miscellaneous expenses 600
Depreciation on furniture 375
Surplus 7,075
(Excess of Income over
Expenditure)
14,000 14,000

1.4.2 Distinction between Income and Expenditure Account and Receipt

and Payment Account
Based upon discussion made in regard to the Receipts and Payments Account
and the Income and Expenditure Account we make the distinction between
Income and Expenditure Account and Receipts and Payments Account in the
tabular form:
Basis of distinction Income and Expenditure Receipt and Payment
Account Account

Nature It is like as profit and loss It is the summary of the cash

account. book.
Nature of Items It records income and It records receipts and
expenditure of revenue payments of revenue as well as
nature only. capital nature.
Period Income and expenditure Receipts and payments may
items relate only to the also relate to preceding and
current period. succeeding periods.
Debit side Debit side of this account Debit side of this account
records expenses and losses. records the receipts.
Credit side Credit side of this account Credit side of this account
records income and gains. records the payments.
Depreciation Includes depreciation. Does not includes
depreciation.
Opening Balance There is no opening balance. Balance in the beginning
represents cash in hand /cash
at bank or overdraft at
the beginning.
Closing Balance Balance at the end rep- Balance at the end represents
resents excess of income cash in hand at the end and
over expenditure or vice- bank balance (or bank
versa. overdraft).

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Accounting for Not-for-Profit Organisation 17

1.5 Balance Sheet

‘Not-for-Profit’ Organisations prepare Balance Sheet for ascertaining the financial
position of the organisation. The preparation of their Balance Sheet is on the same
pattern as that of the business entities. It shows assets and liabilities as at the end
of the year. Assets are shown on the right hand side and the liabilities on the left
hand side. However, there will be a Capital Fund or General Fund in place of the
Capital and the surplus or deficit as per Income and Expenditure Account which
is either added to/deducted from the capital fund, as the case may be. It is also
a common practice to add some of the capitalised items like legacies, entrance
fees and life membership fees directly in the capital fund.
Besides the Capital or General Fund, there may be other funds created for
specific purposes or to meet the requirements of the contributors/donors such
as building fund, sports fund, etc. Such funds are shown separately in the
liabilities side of the balance sheet.
Some times it becomes necessary to prepare Balance Sheet as at the beginning
of the year in order to find out the opening balance of the capital/general fund.

1.5.1 Preparation of Balance Sheet

The following procedure is adopted to prepare the Balance Sheet:
1. Take the Capital/General Fund as per the opening balance sheet and
add surplus from the Income and Expenditure Account. Further, add
entrance fees, legacies, life membership fees, etc. received during the year.
2. Take all the fixed assets (not sold/discarded/or destroyed during the
year) with additions (from the Receipts and Payments account) after
charging depreciation (as per Income and Expenditure account) and show
them on the assets side.
3. Compare items on the receipts side of the Receipts and Payments Account
with income side of the Income and Expenditure Account. This is to
ascertain the amounts of: (a) subscriptions due but not yet received:
(b) incomes received in advance; (c) sale of fixed assets made during the
year; (d) items to be capitalised (i.e. taken directly to the Balance Sheet)
e.g. legacies, interest on specific fund investment and so on.
4. Similarly compare, items on the payments side of the Receipt and
Payment Account with expenditure side of the Income and
Expenditure Account. This is to ascertain the amounts if: (a)
outstanding expenses; (b) prepaid expenses; (c) purchase of a fixed
asset during the year; (d) depreciation on fixed assets; (e) stock of
consumable items like stationery in hand; (f) Closing balance of cash
in hand and cash at bank as, and so on.
A proforma Balance Sheet is given for the proper understanding of preparing
the balance sheet.

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18 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Balance Sheet of as on ...............

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital fund:
Opening Balance ...... Cash in hand and /or Cash ......
Add: Surplus at Bank
OR Outstanding Incomes ......
Less: Deficit Prepaid Expenses ......
Add: Capitalised Income of the ...... Stock of Consumable Items:
Current Year on account of: Previous Balance
Legacies ...... Add: Purchases in the current
Entrance Fees ...... period
Life Membership Fees ...... Less: Value consumed during ......
Closing Balance ...... the period
Special Fund/Donations: Previous Balance ......
Previous Balance (If any ) Add: Purchases in the current
Add: Receipts for the item period
during the period Less: Book Value of the Asset
Add: Income earned on sold/disposed off
fund/Donations’ Closing Balance ......
Investments
Less: Expenses paid out of
fund/Donations
Net Balance ......
Creditors for Purchases
and/or supplies ......
Bank Overdraft ......
Outstanding Expenses:
Income received in Advance ......
...... ......

Fig. 1.2: Proforma Balance Sheet

Illustration 4
From the following Receipt and Payment Account and additional information
relating to Excellent Cricket Club, prepare Income and Expenditure Account
for the year ended March 31, 2015 and Balance Sheet as on date.
Dr. Cr.
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d (Cash in Hand) 18,000 Balance b/d (bank overdraft) 16,000
Member’s subscriptions 2,50,000 Upkeep of field and pavilion 1,15,000
Member’s admission fee 15,000 Tournament expenses 40,000
Sale of old sports materials 2,500 Rates and Insurance 10,000
Hire of ground 28,000 Telephone 3,500
Subscription for tournament 60,000 Postage and Courier charges 4,000
Life membership fee 20,000 Printing and Stationery 26,000
Donations 6,00,000 Miscellaneous expenses 4,400

2015-16
Accounting for Not-for-Profit Organisation 19

Secretary’s honorarium 30,000

Grass seeds 2,600
Investments 6,00,000
Purchase of sports materials 68,000
Balance c/d 74,000
9,93,500 9,93,500

Assets at the beginning of the year were:

Rs.
Play ground 5,00,000
Cash in hand 18,000
Stock of sports materials 85,000
Printing and Stationery 11,000
Subscriptions receivable 28,000
Donations and Surplus on account of tournament are to be kept in Reserve for a
permanent pavilion. Subscriptions due on March 31 , 2015 were Rs. 42,000. Write-off fifty
per cent of sports materials and thirty per cent of printing and stationery.
Solution
Books of Excellent Cricket Club
Income and Expenditure Account for the year ending on March 31, 2015
Dr. Cr.

Expenditure Amount Income Amount

(Rs.) (Rs.)
Upkeep of field and pavilion 1,15,000 Subscriptions 2,50,000
Rates and Insurance 10,000 Add: Outstanding
Telephone 3,500 (closing) 42,000
Postage and Courier charges 4,000 2,92,000
Printing & stationery 26,000 Less: Outstanding
Add: Opening stock 11,000 (opening) 28,000 2,64,000
Available for use 37,000 Admission fees 15,000
Less: Closing stock 25,900 11,100 Sale of old sports material 2,500
Stationery consumed 4,400 Rent of hall 28,000
Miscellaneous expenses 30,000
Secretary’s honorarium 2,600
Grass seeds
Sports materials consumed:
Opening stock 85,000
Add: Purchases 68,000
1,53,000
Less: Closing stock 76,500 76,500
Surplus 52,400
(Excess of income over
expenditure)
3,09,500 3,09,500

Note: Since the opening balance of the capital fund is not given, the same has been
ascertained by preparing opening balance sheet.

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20 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Balance Sheet of Excellent Cricket Club as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital Fund 6,26,000 Cash in hand 74,000
Add: Surplus 52,400 Outstanding subscriptions 42,000
6,78,400 Stock of sports materials 76,500
Add: Life membership Stock of printing 25,900
fee 20,000 6,98,400 and stationery
Pavilion Fund: Investments 6,00,000
Surplus from Tournament Play ground 5,00,000
(Rs.60,000-40,000) 20,000
Donation 6,00,000 6,20,000
13,18,400 13,18,400

Balance Sheet of Excellent Cricket Club as on March 31, 2014

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Bank overdraft 16,000 Cash in hand 18,000
Capital/General fund Outstanding subscription 28,000
(balancing figure) 6,26,000 Stock of sports materials 85,000
Printing and Stationery 11,000
Play ground 5,00,000
6,42,000 6,42,000

Test your Understanding – I

State with reasons whether the following statements are TRUE or FALSE:
(i) Receipt and Payment Account is a summary of all capital receipts and payments.
(ii) If there appears a sports fund, the expenses incurred on sports activities will
be shown on the debit side of Income and Expenditure Account.
(iii) A credit balance of Income and Expenditure Account denotes excess if expenses
over incomes.
(iv) Scholarships granted to students out of funds provided by government will be
debited to Income and Expenditure Account.
(v) Receipt and Payment Account records the receipts and payments of revenue
nature only.
(vi) Donations for specific purposes are always capitalized.
(vii) Opening balance sheet is prepared when the opening balance of capital fund is
not given.
(viii) Surplus of Income and Expenditure Account is deducted from the capital/
general fund.
(ix) Receipt and Payment Account is equivalent to profit and loss account.
(x) Receipt and Payment Account does not deference between capital and revenue
receipts.

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Accounting for Not-for-Profit Organisation 21

1.6 Some Peculiar Items

Final accounts of the Not-for-Profit organisations are prepared on the similar
pattern as that of a business orgnisation. However, a few items of income and
expenses of such orgnisations are somewhat different in nature and need special
attention in their treatment in final accounts. They are peculiar to these
orgnisations. Some of the common peculiar items are explained as under:
Subscriptions: Subscription is a membership fee paid by the member on annual
basis. This is the main source of income of such orgnisations. Subscription paid
by the members is shown as receipt in the Receipt and Payment Account and as
income in the Income and Expenditure Account. It may be noted that Receipt
and Payment Account shows the total amount of subscription actually received
during the year while the amount shown in Income and Expenditure Account is
confined to the figure related to the current period only irrespective of the fact
whether it has been received or not. For example, a club received Rs. 20,000 as
subscriptions during the year 2014-15 of which Rs.3,000 relate to year
2013-14 and Rs.2,000 to 2015-16, and at the end of the year 2014-15 Rs.6,000
are still receivable. In this case, the Receipt and Payment Account will show
Rs.20,000 as receipt from subscriptions. But the Income and Expenditure
Account will show Rs. 21,000 as income from subscriptions for the year
2014-15, the calculation of which is given as below:
Rs.
Subscriptions received in 2014-15 20,000
Less: Subscriptions for the year 2013-14 3,000
17,000
Less: Subscription for the year 2015-16 2,000
15,000
Add: Subscriptions outstanding for the year 2014-15 6,000
Income from subscriptions for the year 2014-15 21,000

The above amount of subscriptions to be shown as income can also be

ascertained by preparing the subscription account as follows:
Subscription Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. A m o u n t
(Rs.) (Rs.)
Balance b/d 3,000 Balance b/d Nil
(outstanding at the (received in advance
beginning) during previous year)
Income and Expenditure 21,000 Cash (subscription 20,000
Account (balancing figure) received)
Balance c/d 2,000 Balance c/d 6,000
(received in advance) (outstanding at the end)
26,000 26,000

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22 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Illustration 5
As per Receipt and Payment Account for the year ended on March 31, 2015, the
subscriptions received were Rs. 2,50,000. Additional Information given is as
follows:
1. Subscriptions Outstanding on 1.4.2014 Rs. 50,000
2. Subscriptions Outstanding on 31.3.2015 Rs.35,000
3. Subscriptions Received in Advance as on 1.4.2014 Rs.25,000
4. Subscriptions Received in Advance as on 31.3.2015 Rs.30,000
Ascertain the amount of income from subscriptions for the year 2014–15
and show how relevant items of subscriptions appear in opening and closing
balance sheets.

Solution
Details Amount
(Rs.)
Subscriptions Received as per Receipt and Payment account 2,50,000
Add: Subscriptions outstanding on 31.3.2015 35,000
Add: Subscriptions received in advance on 1.4.2014 25,000

3,10,000
Less: Subscriptions outstanding on 1.4.2014 50,000
2,60,000
Less: Subscriptions received in advance on 31.3.2015 30,000
Income from subscription for the year 2014–15 2,30,000

Alternately, income received from subscriptions can be calculated by

preparing a Subscriptions account as under.
Subscription Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Balance b/d (outstanding) 50,000 Balance b/d (advance) 25,000
Income and Receipts and Payments A/c 2,50,000
Expenditure Account 2,30,000 Balance b/d (outstanding) 35,000
(balancing figure)
Balance c/d (advance) 30,000
3,10,000 3,10,000

Relevant items of subscription can be shown in the opening and closing

balance sheet as under:

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Accounting for Not-for-Profit Organisation 23

Balance Sheet as on March 31, 2014

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Subscriptions received in advance 25,000 Subscription outstanding 50,000
*Relevant data only
Balance Sheet as on March 31, 2015
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Subscriptions received in advance 30,000 Subscriptions outstanding 35,000
*Relevant data only

Illustration 6
Extracts of Receipt and Payment Account for the year ended March 31, 2015
are given below:
Receipt
Subscriptions (Rs.)
2013-14 2,500
2014-15 26,750
2015-16 1,000
30,250
Additional Information:
Total number of members: 230.
Annual membership fee: Rs. 125.
Subscriptions outstandings on April 1, 2013: Rs. 2,750.
Prepare a statement showing all relevant items of subscriptions viz., income, advance,
outstandings, etc.

Solution
Amount of subscription due for the year 2014-15 irrespective of cash
Rs. 28,750 (i.e. Rs. 125 × Rs. 230).
Details Amount
(Rs.)
Subscriptions received as per Receipts and Payments Account 30,250
Add: Subscriptions outstanding on March 31, 2014 2,250
Add: Subscriptions received in advance on April 1, 2013 NIL
32,500
Less: Subscriptions outstanding on April 1, 2013 2,750
29,750
Less: Subscriptions received in advance on March 31, 2014 1,000
Income from Subscription for the year 2014-15. (125×230) 28,750
Note: The amount of subscriptions outstanding as on 01-04-2014 has been ascertained
as follows:

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24 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Details (Rs.) (Rs.)

(i) Outstanding as on 01.04.2014 2,750
Received for 2013–14 2,500 250
(ii) Due for 2014–15 (125×230) 28,750
Received for 2014–15 26,750 2,000
Outstanding as on 31-3-2015 2,250

Illustration 7
From the following extract of Receipt and Payment Account and the additional
information given below, compute the amount of income from subscriptions
and show as how they would appear in the Income and Expenditure Account
for the year ending March 31, 2015 and the Balance Sheet.
Receipt and Payment Account for the year ending March 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Subscriptions:
2013-14 7,000
2014-15 30,000
2015-16 5,000 42,000

Additional Information: Rs.

1. Subscriptions outstanding March 31, 2014 8,500
2. Total Subscriptions outstanding March 31, 2015 18,500
3. Subscriptions received in advance 4,000
as on March 31, 2014

Solution
Income and Expenditure Account
for the year ending on March 31, 2015
Expenditure Amount Income Amount
(Rs.) (Rs.)
Subscriptions 30,000
Received for 2014-15
Add: Outstanding for 2014-15 17,000
Add: Received in advance for 4,000
2014-15
51,000

Note: Total amount of subscriptions outstanding as on 31-3-2015 are Rs. 18,500. This,
includes Rs. 1,500 (Rs. 8,500 – Rs. 7,000) for subscriptions still outstanding for
2013–14. Hence, the subscriptions outstanding for 2014–15 are Rs. 17,000
(Rs. 18,500 – Rs. 1,500).

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Accounting for Not-for-Profit Organisation 25

Balance Sheet (Relevant Data) as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Subscription Received in Subscription Outstanding:
Advance for 2014-15 2013-14 1,500
5,000 2014-15 1,7000 18,500
*Relevant data only

Do it Yourself
1. Subscriptions received by the health club during the year 2013 were as under:
Rs.
2012 3,000
2013 96,000
2014 2,000
1,01,000
Rs.
Subscriptions Outstanding as on 31.12.12 5,000
Subscriptions Outstanding as on 31.12.13 12,000
Subscriptions received in advance in 2012 for 2013 5,000
Calculate the amount of subscriptions to be shown on the income side of Income
and Expenditure A/c.
2. During the year 2013, subscriptions received by a sports club were Rs. 80,000.
These included Rs. 3,000 for the year 2010 and Rs.6,000 for the year 2014. On
December 31, 2012 the amount of subscriptions due but not received was
Rs.12,000. Calculate the amount of subscriptions to be shown in Income and
Expenditure Account as income from subscription.
3. Subscriptions received during the year ended December 31, 2013 by Royal
Club were as under:
Rs.
2012 3,000
2013 93,000
2014 2,000
98,000

The club has 500 members each paying @ Rs.200 as annual subscription.
Subscriptions outstanding as on December 31, 2012 are Rs. 6,000. Calculate
the amount of subscriptions to be shown as income in the Income and
Expenditure Account for the year ended December 31, 2013 and show the
relevant data in the Balance Sheet as on date.

Donations: It is a sort of gift in cash or property received from some person or

organisation. It appears on the receipts side of the Receipts and Payments
Account. Donation can be for specific purposes or for general purposes.
(i) Specific Donations: If donation received is to be utilised to achieve specified
purpose, it is called Specific Donation. The specific purpose can be an

2015-16
26 Accountancy – Not-for-Profit Organisation and Partnership Accounts

extension of the existing building, construction of new computer

laboratory, creation of a book bank, etc. Such donation is to be capitalised
and shown on the liabilities side of the Balance Sheet irrespective of the
fact whether the amount is big or small. The intention is to utilise the
amount for the specified purpose only.
(ii) General Donations: Such donations are to be utilised to promote the
general purpose of the organisation. These are treated as revenue receipts
as it is a regular source of income hence, it is taken to the income side of
the Income and Expenditure Account of the current year.
Legacies: It is the amount received as per the will of a deceased person. It appears
on the receipts side of the Receipt and Payment Account and is directly added to
capital fund/general fund in the balance sheet, because it is not of recurring
nature. However, legacies of a small amount may be treated as income and shown
on the income side of the Income and Expenditure Account.
Life Membership Fees: Some members prefer to pay lump sum amount as life
membership fee instead of paying periodic subscription. Such amount is treated
as capital receipt and credited directly to the capital/general fund.
Entrance Fees: Entrance fee also known as admission fee is paid only once by
the member at the time of becoming a member. In case of organisations like clubs
and some charitable institutions, is limited and the amount of entrance fees is
quite high. Hence, it is treated as non-recurring item and credited directly to
capital/general fund. However, for some organisations like educational institutions,
the entrance fees is a regular income and the amount involved may also be small.
In their case, it is customary to treat this item as a revenue receipt. However, if
there is specific instruction, it is advisable to treat the entire amount as capital
receipt and the relevant amount should be directly added to capital/general fund.
Sale of old asset: Receipts from the sale of an old asset appear in the Receipts
and Payments Account of the year in which it is sold. But any gain or loss on the
sale of asset is taken to the Income and Expenditure Account of the year. For
example, if an item furniture with a book value of Rs. 800 is sold for Rs. 700,
this amount of Rs. 700 will be shown as receipt in Receipts and Payments
Account and Rs. 100 on the expenditure side of the Income and Expenditure
Account as a loss on sale of old asset and while showing furniture in the balance
sheet Rs. 800 will be deducted from its total book value.
Sale of Periodicals: It is an item of recurring nature and shown as the income
side of the Income and Expenditure Account.
Sale of Sports Materials: Sale of sports materials (used materials like old balls,
bats, nets, etc) is the regular feature with any Sports Club. It is usually shown
as an income in the Income and Expenditure Account.

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Accounting for Not-for-Profit Organisation 27

Payments of Honorarium: It is the amount paid to the person who is not the
regular employee of the institution. Payment to an artist for giving performance
at the club is an example of honorarium. This payment of honorarium is shown
on the expenditure side of the Income and Expenditure Account.
Endowment Fund: It is a fund arising from a bequest or gift, the income of
which is devoted for a specific purpose. Hence, it is a capital receipt and shown
on the Liabilities side of the Balance Sheet as an item of a specific purpose fund.
Government Grant: Schools, colleges, public hospitals, etc. depend upon
government grant for their activities. The recurring grants in the form of
maintenance grant is treated as revenue receipt (i.e. income of the current year)
and credited to Income and Expenditure account. However, grants such as
building grant are treated as capital receipt and transferred to the building fund
account. It may be noted that some Not-for-Profit organisations receive cash
subsidy from the government or government agencies. This subsidy is also
treated as revenue income for the year in which it is received.

Special Funds
The Not-for-Profit Organisations office create special funds for certain purposes/
activities such as 'prize funds', 'match fund' and 'sports fund', etc. Such funds
are invested in securities and the income earned on such investments is added
to the respective fund, not credited to Income and Expenditure Account.
Similarly, the expenses incurred on such specific purposes are also deducted
from the special fund. For example, a club may maintain a special fund for
sports activities. In such a situation, the interest income on sports fund
investments is added to the sports fund and all expenses on sports deducted
therefrom. The special funds are shown in balance sheet. However, if, after
adjustment of income and expenses the balance in specific or special fund is
negative, it is transferred to the debit side of the Income and Expenditure
Account or adjusted as per prescribed directions. (see Illustrations 8 and 9.)

Illustration 8
Show how you would deal with the following items in the financial statements of
a Club:
Details Debit Credit
Amount Amount
(Rs.) (Rs.)

Prize Fund 80,000

Prize Fund Investments 80,000
Income from Prize Fund Investments 8,000
Prizes awarded 6,000

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28 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Solution
Balance Sheet as on………..
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Prize fund 80,000 Prize Fund Investments 80,000
Add: Income from 8,000
Investments 88,000
Less: Prizes Awarded 6,000 82,000

Illustration 9
(a) Show the following information in financial statements of a ‘ Not-for-Profit’
Organisation:
Details Amount
(Rs.)
Match Expenses 16,000
Match Fund 8,000
Donation for Match Fund 5,000
Sale of Match tickets 7,000

(b) What will be the effect, if match expenses go up by Rs. 6,000 other things
remaining the same?

Solution
(a)
Balance Sheet as on………..*
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Match fund 8,000
Add: Donation 5,000
(Specific)
Add: Sale of Match 7,000
Tickets 20,000
Less: Match Expenses 16,000 4,000
4,000

* Only relevant data.

(b)
If match expenses go up by Rs. 6,000, the net balance of the match fund
becomes negative i.e. Debit exceeds the Credit, and the resultant debit balance
of Rs. 2,000 shall be charged to the Income and Expenditure Account of that
year.

2015-16
Accounting for Not-for-Profit Organisation 29

Test your Understanding – II

How would you treat the following items in the case of a ‘not-for-profit’ organisation?
1. Tournament Fund Rs. 40,000. Tournament Expenses Rs. 14,000. Receipts
from Tournament Rs. 16,000.
2. Table Tennis match expenses Rs. 4,000.
3. Prize Fund Rs. 22,000. Interest on Prize fund Investments Rs. 3,000. Prizes
given Rs. 5,000. Prize fund Investments Rs. 18,000.
4. Receipts from Charity Show Rs. 7,000. Expenses on Charity Show Rs. 3,000.

Illustration 10
Extract of a Receipt and Payment Account for the year ended on March 31,
2015:
Payments:
Stationery Rs. 23,000
Additional Information:
Details April 1, 2014 March 31, 2015
Stock of stationery 4,000 3,000
Creditors for stationery 9,000 2,500

Solution

Details Amount
(Rs.)

Payment made for the purchase of stationery as per

Receipts and Payments account 23,000
Less: Payment for 2013-14 (i.e. creditors in the beginning) 9,000
Payment made for the year 2014-15 14,000
Add: Payment not yet made (i.e. creditors at the end) 2,500
Stationery Purchased for the year 2014-15 16,500
Add: Stock in the beginning 4,000
Stationery Available for consumption during 2014-15 20,500
Less: Stock at the end 3,000
Stationery Consumed during 2014-15 to be taken to the
Expenditure side of the Income and Expenditure account 17,500

Stationery: Normally expenses incurred on stationary, a consumable items are

charged to Income and Expenditure Account. But in case stock of stationery
(opening and/or closing) is given, the approach would be make necessary
adjustments in purchases of stationery and work out cost of stationery consumed
and show that amount in Income and Expenditure Account and its stock in the

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30 Accountancy – Not-for-Profit Organisation and Partnership Accounts

balance sheet. For example, the Receipt and Payment Account shows a payment
for stationery amounting to Rs. 40,000 and there is an opening and closing
stationery amounting to Rs. 12,000 and Rs. 15,000. The amount of expense on
stationery will be worked out as follows:
Stationery
Purchases 40,000
Add: Opening stock 12,000
52,000
Less: Closing stock 15,000
37,000

In case stationery is also purchased on credit, the amount of its consumption

will be worked out as given in Illustration 12.

Do it Yourself
1. Find out the cost of medicines consumed during 2014-15 from the following
information:
Details Amount
(Rs.)

Payment for purchase of medicines 3,70,000

Creditors for medicines purchased:
On 1.4.2014 25,000
On 31.3.2015 17,000
Stock of Medicines:
On 1.4.2014 62,000
On 31.3.2015 54,000
Advance to suppliers of medicines:
On 1.4.2014 11,500
On 31.3.2015 18,200

2. What amount of sports material will be posted to Income and Expenditure

Account for the year ended March 31, 2014 as expenditure? :
Amount
(Rs.)
Stock of sports materials as on April 1, 2014 7,500
Creditors for sports material as on April 1, 2014 2,000
Stock of sports material as on March 31, 2015 6,200
Amount paid for sports material during the year 2014-15 17,000
Advance paid for sports material as on March 31, 2015 3,500
Creditors for sports material as on March 31, 2015 1,200

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Accounting for Not-for-Profit Organisation 31

Illustration 11
Following is the Receipt and Payment Account of an Entertainment Club for the
period April 1, 2015 to March 31, 2016.
Receipt and Payment Account for the year ending March 31, 2016
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d Salaries 24,000
Cash 27,500 Electric bill 21,000
Bank 60,000 87,500 Food stuff for restaurant 60,000
Member’s subscriptions: Telephone bill 35,000
2014-2015 12,500 Subscription for periodicals 14,500
2015-2016 1,00,000 Printing and stationery 13,000
2016-2017 10,000 1,22,500 Sports expenses 50,000
Sale of furniture Secretary’s honorarium 30,000
(book value: Rs. 8,000) 10,000 8% Investments (31.3.2007) 1,00,000
Sale of food stuffs 1,00,000 Balance c/d:
Sale of old periodicals 3,200 Cash 21,500
and newspapers Bank 45,000 66,500
Hire of ground used 48,750
for marriage
Donation for sports fund 25,000
Locker Rent 17,050
4,14,000 4,14,000

Additional Information
1. The club had 225 members, each paying an annual subscription of Rs. 500.
Subscription outstanding as on 31 March 2016 Rs. 15,000.
2. Telephone bill outstanding for the year 2015-2016 is Rs. 2,000.
3. Locker Rent Rs. 3,050 outstanding for the year 2014-15 and Rs. 1,500 for
2015-16.
4. Salary outstanding for the year 2015-16 Rs. 4,000.
5. Opening Stock of Printing and stationery Rs. 2,000 and closing stock of printing
and stationery is Rs. 3,000 for the year 2015-16.
6. On 1st April 2015 other balances were as under:
Rs.
Furniture 1,00,000
Building 6,50,000
Sports fund 15,000
7. Depreciation Furniture and Building @ 12.5% and 5% respectively assuming that
it is on reducing balance for the year ending March 31.2016
Prepare Income and Expenditure account and Balance Sheet as on
that date.

2015-16
32 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Solution
Book of Entertainment Club
Income and Expenditure Account
for the year ending on March 31, 2016

Expenditure Amount Income Amount

(Rs.) (Rs.)
Salary 24,000 Subscriptions 1,00,000
Add: Outstanding 4,000 28,000 Add: Outstanding 12,500 1,12,500
Electric Bill 21,000 Sale of old periodicals 3,200
Telephone Bill 35,000 Profit on sale of furniture 2,000
Add: Outstanding 2,000 37,000 Hire of ground for marriage 48,750
Subscription for periodicals 14,500 Locker rent 17,050
Printing and Stationery 13,000 Less: Opening o/s 3,050
Add: Opening Stock 2,000 14,000
15,000 Add: Closing o/s 1,500 15,500
Less: Closing stock 3,000 12,000
Secretary's honorarium 30,000 Sale of Food Stuff 1,00,000
Sports Expenses 50,000 Cost of food Consumed 60,000 40,000
Less: Opening Balance
of sports fund 15,000
35,000
Less: Donation for
Sports 25,000 10,000

Depreciation On:
Furniture 11,500
Building 32,500 44,000
Surplus (Excess of Income over 25,450
Expenditure)

2,21,950 2,21,950

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Accounting for Not-for-Profit Organisation 33

Balance Sheet of Entertainment Club as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Sports fund 15,000 Cash in hand 27,500
Capital/General Fund 8,42,550 Cash at bank 60,000
(Balancing figure) Outstanding subscription 15,000
Outstanding locker Rent 3,050
Printing & Stationery 2,000
Furniture 1,00,000
Buildings 6,50,000
8,57,550 8,57,550

Balance Sheet of Entertainment Club as on March 31, 2016

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Subscriptions received in
advanced 10,000 Cash in hand 21,500
Outstanding Telephone Bill 2,000 Cash at bank 45,000
Salary Outstanding 4,000 Outstanding subscriptions 15,000
Capital/General Fund 8,42,550 (2015 Rs 2500 and 2016 Rs 12500)
Add: Surplus 25,450 8,68,000 Outstanding locker Rent 1,500
Printing and Stationery 3,000
Furniture 1,00,000
Less: Sales 8,000
92,000
Less: Depreciation 11,500 80,500

Building 6,50,000
Less: Depreciation 32,500 6,17,500
Investment 1,00,000

8,84,000 8,84,000

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34 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Illustration 12
Prepare Income and Expenditure Account and Balance Sheet for the year ended
March 31, 2015 from the following information.
Receipt and Payment Account for the year ending March 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 41,000 Salaries and Wages:
Subscriptions: 2013-14 4,800
2013-14 7,200 2014-15 83,200 88,000
2014-15 3,37,600 Sundry expenses 37,000
2015-16 12,000 3,56,800 Freehold land 60,000
Entrance fees 16,000 Stationery 16,000
Locker rent 58,000 Rates 24,000
Revenue from refreshment 48,000 Refreshment expenses 37,500
Income from investments 56,000 Telephone charges 4,000
Investments 2,50,000
Audit fee 6,000
Balance c/d 53,300
5,75,800 5,75,800

The following additional information is provided to you:

1. There are 1800 members each paying an annual subscription of
Rs. 200, Rs. 8,000 were in arrears for 2013-14 as on April 1, 2014.
2. On March 31, 2015 the rates were prepaid to June 2015; the charge
paid every year being Rs. 24,000.
3. There was an outstanding telephone bill for Rs. 1,400 on March 31, 2015.
4. Outstanding sundry expenses as on March 31, 2014 totaled Rs. 2,800.
5. Stock of stationery as on March 31, 2014 was Rs. 2000; on March 31, 2015, it
was Rs. 3,600.
6. On March 31, 2014 Building stood at Rs. 4,00,000 and it was subject to
depreciation @ 2.5% p. a.
7. Investment on March 31, 2014 stood at Rs. 8,00,000.
8. On March 31, 2015, income accrued on investments purchased during
the year amounted to Rs. 1,500.

2015-16
Accounting for Not-for-Profit Organisation 35

Solution
Income and Expenditure Account
for the year ending on March 31, 2015
Dr. Cr.
Expenditure Amount Income Amount
(Rs.) (Rs.)
Salaries and Wages 83,200 Subscriptions 3,60,000
Sundry Expenses 37,000 Entrance fees 16,000
Less: Outstanding on Locker rent 58,000
31.3.2014 2,800 34,200 Income from refreshment:
Stationery : (consumed) Revenue from 48,000
Opening stock 2,000 refreshment
Add: Purchases 16,000 Less: Refreshment 37,500 10,500
Less: Closing stock 3,600 14,400 expenses
Rates 24,000 Income from 56,000
Less: Paid for 2015-16 6,000 investments
Add: Prepaid in 2014-15 6,000 24,000 Add: Accrued income 1,500 57,500
Telephone charges 4,000 on current year
Add: Outstanding 1,400 5,400 investment
audit fee 6,000
Surplus Depreciation on building 10,000
(excess of Income over
expenditure) 3,24,800

5,02,000 5,02,000

Balance Sheet as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Outstanding Telephone 1,400 Cash and Bank Balance 53,300
Expenses Subscription in Arrears 23,200
Subscription received in 12,000 Stock of Stationery 3,600
Advance Rates Prepaid 6,000
General Fund 12,49,400 Accrued Interest on investment: 1,500
Add: Surplus 3,24,800 15,74,200 Investments 8,00,000
Additions 2,50,000 10,50,000
Building 4,00,000
Less: Depreciation 10,000 3,90,000
Land 60,000
15,87,600 15,87,600

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36 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Balance Sheet as on March 31, 2014

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Outstanding Sundry Expenses 2,800 Cash and Bank balance 41,000
Outstanding Salary and Wages 4,800 Subscription in arrears 8,000
General Fund 12,49,400 Stock of stationery 2,000
(Balancing figure) Rates prepaid 6,000
Investments 8,00,000
Building 4,00,000
12,57,000 12,57,000

Working Note :

Subscription Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
Opening Balance or 8,000 Receipt and Payment 3,56,800
Balance b/d (Arrears Balance c/d 23,200
for 2013-14)
Income and Expenditure 3,60,000
(1800×200)
Balance 12,000
c/d (Advance for
2015-16)
3,80,000 3,80,000

Illustration 13
Following is the Receipt and Payment Account of Friendship Club in respect of
the Year on 31.3.2015.

Receipt and Payment Account for the year ending March 31, 2015.

Receipts Amount Payment Amount

(Rs.) (Rs.)
Opening cash in hand 10,000 Salaries 20,000
Subscription: Stationery 4,500
2013-14 15,000 Rates and Taxes 1,500
2014-15 20,000 Telephone charges 7,500
2015-16 5,000 40,000 8% govt. securities at par 25,000
Profit from sports 17,800 Sundry expenses 500
Interest on 8% govt. securities 5,000 Courier service charges 300
Closing cash in hand 13,500
72,800 72,800

2015-16
Accounting for Not-for-Profit Organisation 37

Additional Information :
1. There are 500 members, each paying an annual subscription of Rs. 50, Rs. 17,500
being in arrears for 2013-14 at the beginning of 2014-15. During 2013-14,
subscriptions were paid in advance by 40 members for 2014-15.
2. Stock of stationery at March 31, 2014, was Rs. 1,500 and at March 31, 2015, Rs. 2,000.
3. At March 31, 2006, the rates and taxes were prepaid to the following January 31,
the annual charge being Rs. 1,500.
4. A quarter’s charge for telephone is outstanding, the amount accrued being Rs.
1,500. There is no change in quarterly charge.
5. Sundry expenses accruing at 31.3.2014 were Rs. 250 and at March 31, 2015 Rs. 300.
6. At March 31, 2014 Building stood in the books at Rs. 2,00,000 and it is required
to write off depreciation @ 10% p.a.
7. Value of 8% Government Securities at March 31, 2005 was Rs. 75,000 which were
purchased at that date at Par. Additional Gover nment Securities worth Rs. 25,000
are purchased on March 31, 2015.
You ar e required to prepare:
(a) An Income and Expenditure Account for the year ended on 31.3.2015
(b) A Balance Sheet on that date.

Solution
Books of Friendship Club
Balance Sheet a s on March 31, 2014
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Outstanding Expenses: Building 2,00,000
Telephone charges 3,000 Investment in 8% Govt. 75,000
Sundry Expenses 250 3,250 Securities
Subscription received in 2,000 Stock of stationery 1,500
Advance Prepaid Rates and Taxes 1,250
General Fund 3,00,000 Subscription outstanding 17,500
(balancing figure) Cash in hand 10,000
3,05,250 3,05,250

Income and Expenditure Account

for the year ending on March 31, 2015
Expenditure Amount Income Amount
(Rs.) (Rs.)
Salaries 20,000 Profit on Sports 17,800
Stationery (paid) 4,500 Interest on 8% Govt. 5,000
Add: Opening stock 1,500 Securities Received
6,000 Add: Receivable 1,000 6,000
Less: Closing stock 2,000 Total Subscription 40,000
Stationery consumed 4,000 Received during
Rates and Taxes 1,500 the current year

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38 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Less: Closing Prepaid 1,250 Add: Opening 2,000

250 Subscription in advance
Add: Opening Prepaid 1,250 1,500 Add: Outstanding at 5,500
Telephone charges paid 7,500 the end of the
Add: Outstanding 1,500 Current Year
(Current Year) 9,000 (2,500+3,000)= 47,500
Less: Outstanding 3,000 6,000 Less: Subscription 5,000
(Previous year) received in 42,500
Sundry expenses paid 500 Advance(Closing)
Add: Outstanding 300 Less: Outstanding 17,500 25,000*
(Current Year) 800 at the start of
Less: Outstanding 250 550 the Current Year
(Previous year) Deficit: (Excess of Expenditure 3,550
Depreciation on building 20,000 over to Income)
Courier charges 300
52,350 52,350

• Verification: 500 × 50 = 25000.

Balance Sheet of Friendship Club as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Outstanding Expenses: Building : 2,00000
Telephone charges 1,500 Less: depreciation 20,000 1,80,000
Sundry Expenses 300 1,800 Investment in 8% 75,000
Subscription received in 5,000 Govt. Securities:
Advance Add: Purchases 25,000 1,00,000
General Fund 3,00,000 Stock of stationery 2,000
Less: Deficit 3,550 2,96,450 Interest on 8% 1,000
Govt. securities Receivable
Prepaid Rates and Taxes 1,250
Subscription outstanding 5,500
(Rs.17,500-Rs. 5,000)
+Rs. 3,000= Rs.5,500
Cash in hand 13,500
3,03,250 3,03,250

1.7 Income and Expenditure Account based on Trial Balance

In case of not-for-profit organisations, normally the Income and Expenditure
Account and Balance Sheet is prepared based on the Receipts and Payments
Account and the additional information given. But, sometimes, the trial
balance along with some additional information is given for this purpose.
See Illustration 14.

2015-16
Accounting for Not-for-Profit Organisation 39

Illustration 14
From the trial balance and other information given below for a school, prepare
Income and Expenditure Account for the year ended on 31.3.2014 and a Balance
Sheet as on that date:
Debit Balance Amount Credit Balance Amount
(Rs.) (Rs.)
Building 6,25,000 Admission fees 12,500
Furniture 1,00,000 Tuition fees received 5,00,000
Library books 1,50,000 Creditors for supplies 15,000
Investment @12% 5,00,000 Rent for the school hall 10,000
Salaries 5,00,000 Miscellaneous receipts 30,000
Stationery 40,000 Government grant 3,50,000
General expenses 18,000 General fund 10,00,000
Sports expenses 15,000 Donation for library books 62,500
Cash at bank 50,000 Sale of old furniture 20,000
Cash in hand 2,000
20,00,000 20,00,000

Additional Information:
(i) Fees yet to be received for the year are Rs. 25,000.
(ii) Salaries yet to be paid amount to Rs.30,000.
(iii) Furniture costing Rs. 40000 was purchased on October 1, 2010.
(iv) The book value of the furniture sold was Rs. 50,000 on April 1, 2013
(v) Depreciation is to be charged @ 10% p.a. on furniture, 15% p.a. on Library books,
and 5% p.a. on building.

Solution
Income and Expenditure Account
for the year ending on March 31, 2014
Expenditure Amount Income Amount
(Rs.) (Rs.)
Loss on sale of old furniture 30,000 Admission fees 12,500
(50,000 –20,000) Tuition fees 5,00,000
Salaries 5,00,000 Add: Outstanding 25,000 5,25,000
Add: outstanding 30,000 5,30,000 Rent for the school hall 10,000
Stationery 40,000 Miscellaneous receipts 30,000
General expenses 18,000 Government grant 3,50,000
Depreciation: Interest accrued on 60,000
Furniture 3,000 investments
Building 31,250
Library books 22,500 56,750
Sports expenses 15,000
Surplus (excess of income 2,97,750
over expenditure)
9,87,500 9,87,500

2015-16
40 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Working Notes:
1. As admission fee is a regular income of a school, so it has been taken as a revenue
income of the school.
2. Depreciation on furniture has been computed as following on the assumption
that furniture was sold on April 1, 2013.
Amount
(Rs.)
Book Value on March 31, 2014 1,00,000
Less: Book Value of Sold fur niture (50,000)
50,000

Depreciation on furniture of Rs. 10,000 for one year 1,000

Depreciation on furniture of Rs. 40,000 for 6 months 2,000
Total depreciation 3,000

Balance Sheet as on March 31, 2014

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors for Supplies 15,000 Buildings 6,25,000
Outstanding Salaries 30,000 Less: Depreciation 31,250 5,93,750
Donation for Library Books 62,500 Furniture 1,00,000
General fund 10,00,000 Less: Sold 50,000
Add: Surplus 2,97,750 12,97,750 50,000
Less: Depreciation 3,000 47,000
Accrued fees 25,000
Library books 1,50,000
Less: Depreciation 22,500 1,27,500
Investments @ 12% 5,00,000
Interest accrued 60,000
Cash at bank 50,000
Cash in hand 2,000
14,05,250 14,05,250

1.8 Incidental Trading Activity

Sometimes, trading activities such as chemist Shop, hospital, canteen, beauty
parlour etc. also take place in such organisations to provide certain facilities to
members or public in general. In such a situation, trading account has to be
prepared to ascertain the results of such incidental activity. The profit from such
commercial (trading) activities is applied to fulfill the main objectives for which
the organisation was set up, and so it is transferred to the Income and
Expenditure Account. It is pertinent to note the following procedure:
1. Prepare trading account to determine profit (or Loss) due to incidental
commercial (trading) activity. All costs and revenues directly and exclusively

2015-16
Accounting for Not-for-Profit Organisation 41

related to such activity are recorded in the trading account. Balance of

trading account is transferred to the Income and Expenditure Account.
2. Income and Expenditure Account records, in addition to trading Profit
(or loss), all other incomes and expenses not recorded in the Trading
Account. Surplus or deficit revealed by the Income and Expenditure
Account is transferred to capital/general fund.
Illustration 15
Following balances have been extracted from the books of Pleasant Club for the
year ended on March 31, 2015:
Details Amount
(Rs.)

Capital Fund as on March 31, 2014 2,05,000

Furniture as on March 31, 2014 21,000
Additions of furniture during the year 23,500
Billiard Table and other accessories as on March 31, 2014 22,250
China glass and cutlery and Linen as on March 31, 2014 6,250
Restaurant receipts during the year 9,68,000
Restaurant stock as on March 31, 2014 9,750
Receipts from billiard Room during the year 86,000
Subscription received during the year 88,750
Interest on deposit received during the year 6,000
Honorarium paid to Secretary 80,000
Purchases for restaurant 5,59,500
Rent and Rates 87,250
Wages (restaurant Rs. 1,25,000) 2,30,750
Repairs and Renewals 44,750
Lighting 44,250
Fuel 33,500
Sundry expenses 8,000
Cash in hand as on March 31, 2014 4,375
Bank balance as on March 31, 2014 36,875
Bank deposit @10% as on March 31, 2014 1,00,000

Payment for purchases included Rs.7,500 for the year ended on March 31,
2014. Restaurant stock as on March 31, 2015 were Rs. 11,250. Amount of
Subscription received included Rs. 12,000 for the previous year and Rs. 3,000
for the next year. Subscription outstanding as on March 31, 2015 were Rs. 12,500.
Depreciation should be provided as per following rate Structure:
(a) Furniture @ 10 %; (b) Billiard Table and other accessories@ 12%; (c)
China glass and cutlery @ 20%.
Cost of boarding expenses of the staff is estimated at Rs. 68,750 of which
Rs. 50,000 is to be charged to Restaurant.

2015-16
42 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Prepare the Receipt and Payment Account; Income and Expenditure Account
and the Balance Sheet showing the working of the Restaurant separately. Cash
in hand on March 31, 2015 was Rs. 8,500.
Solution
Books of Pleasant Club
Receipt and Payment Account
for the year ending on March 31, 2012

Receipts Amount Payments Amount

(Rs.) (Rs.)
Opening Balance: Rent and Rates 87,250
Cash in hand 4,375 Wages:
Cash at bank 36,875 41,250 Restaurant 1,25,000
Subscriptions 88,750 Others 1,05,750 2,30,750
Interest on deposit 6,000 Repairs and Renewals 44,750
Restaurant receipts 9,68,000 Furniture purchased 23,500
Billiard receipts 86,000 Honorarium of Secretary 80,000
Purchases for restaurant 5,59,500
Lighting 44,250
Fuel 33,500
Sundry expenses 8,000
Closing balance:
Cash in hand 8,500
Cash at bank 70,000 78,500
(balancing figure)
11,90,000 11,90,000

Trading Account
for the year ending on March 31, 2015

Details Amount Details Amount

(Rs.) (Rs.)
Opening stock 9,750 Restaurant receipts 9,68,000
Purchases 5,59,500 Cost of boarding expenses 68,750
Less: Previous year 7,500 5,52,000 of the staff
Wages 1,25,000 Closing stock 11,250
Depreciation of china 1,250
glass cutlery
Cost of boarding expenses 50,000
of the staff
Fuel 33,500
Profit transferred to 2,76,500
Income and Expenditure
10,48,000 10,48,000

2015-16
Accounting for Not-for-Profit Organisation 43

Income and Expenditure Account

for the year ending on March 31, 2015
Expenditure Amount Income Amount
(Rs.) (Rs.)
Wages 1,05,750 Subscription Received 88,750
Repairs and Renewals 44,750 Add: Outstanding 12,500
Honorarium of Secretary 80,000 this year 1,01,250
Lighting 44,250 Less: Outstanding 12,000
Rent and Rates 87,250 previous year 89,250
Cost of boarding Less: Advance for 3,000 86,250
expenses of the staff 18,750 Next year
Sundry expenses 8,000 Interest received 6,000
Depreciation on: Add: Accrued 4,000 10,000
Furniture 4,450 Billiard receipts 86,000
Billiard table 2,670 7,120 Profit transferred 2,76,500
Surplus: (Excess of Income from trading Account
over Expenditure) 62,880
4,58,750 4,58,750

Balance Sheet of Pleasant Club as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital Fund 2,05,000 Furniture:
Add: Surplus 62,880 2,67,880 Opening Balance 21,000
Subscription received 3,000 Add: Additions 23,500
in Advance 44,500
Less: Depreciation 4,450 40,050
Billiard Table 22,250
Less: Depreciation 2,670 19,580
China glass and cutlery 6,250
Less: Depreciation 1,250 5,000
Restaurant stock 11,250
Subscription Outstanding 12,500
Interest Accrued 4,000
Bank deposit 1,00,000
Cash in hand 8,500
Cash at bank 70,000
2,70,880 2,70,880

Illustration 16
Prepare Income and Expenditure Account of Entertainment Club for the year
ending March 31, 2015 and Balance Sheet as on that date from the following
information:

2015-16
44 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Receipt and Payment Account

For the year ending on March 31, 2015

Receipts Amount Payments Amount

(Rs.) (Rs.)
Balance b/d 24,000 Rent and Rates 48,750
Subscriptions Furniture purchased 40,000
2013-14 23,250 Creditors for sports materials 61,000
2014-15 3,36,000 Purchases for sports materials 10,000
2015-16 13,000 3,72,250 Cost of prizes awarded 20,750
Sale of sports materials 26,000 Match expenses 35,150
Entrance fees 40,000 Miscellaneous expenses 1,50,000
General donation 20,250 Balance c/d 1,34,050
Donation for prize fund 14,000
Interest on prize fund
Investments 1,500
Miscellaneous receipts 1,700
4,99,700 4,99,700

Additional Information:
Details Apr. 01, 2014 Mar. 31, 2015

Sports materials 20,000 25,000

Furniture 2,00,000 ?
5% Prize fund investments 60,000 ?
Creditors for sports materials 7,000 14,750
Subscription in arrears 23,750 ?
Prize fund 60,000 ?
Rent paid in advance ---- 3,750
Outstanding rent 3,750
Outstanding miscellaneous expenses 11,400 20,100
Miscellaneous expenses paid in advance 3,750 4,250
Book value of sports materials sold was Rs. 20000
Depreciation on furniture is to be provided @ 10%.
Half of the entrance fee is to be capitalised.
There are 1440 members, each paying an annual
subscription @ Rs. 250.
Subscription received in advance on 1.4.2014
were Rs. 7,000.

2015-16
Accounting for Not-for-Profit Organisation 45

Solution
Books of Entertainment Club
Income and Expenditure Account
for the year ending March 31, 2015

Expenditure Amount Income Amount

(Rs.) (Rs.)
Rent 48,750 Subscriptions 3,36,000
Less: Opening 3,750 Add: Received
Outstanding in advance
45,000 (2014-2015) 7,000
Less: paid in advance 3,750 41,250 Add: Outstanding
Sports Materials (2013–2014) 17,000 3,60,000
Opening stock 20,000 (Rs.3,60,000–Rs.3,43,000) 3,60,000
Add: Payments 61,000 General donations 20,250
to creditor Entrance fees 20,000
81,000 Sports materials
Add: Closing creditor 14,750 (Profit on sale)
95,750 (i.e. 26,000–20,000) 6,000
Add: Cash purchase 10,000 Miscellaneous receipts 1,700
1,05,750
Less: Opening creditor 7,000
98,750
Less: Sports material 20,000
Sold
78,750
Less: Closing stock 25,000 53,750
Match expenses 35,150
Depreciation on furniture 24,000
Miscellaneous expenses:
Paid 1,50,000
Less: Outstanding 11,400
(2013-2014)
1,38,600
Paid in advance 4,250
(2013-2014)
1,34,350
Add: Outstanding 20,100
(2013-2014)
1,54,250
Paid in advance 3,750 1,58,200
(2012-2013)
Surplus (Excess of 95,600
income over expenditure)
4,07,950 4,07,950

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46 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Balance Sheet of Entertainment Club as on March 31, 2014

Liabilities Amount Assets Amount
(Rs,) (Rs,)
Capital Fund (Balancing figure) 2,42,350 Furniture 2,00,000
Prize fund 60,000 5% Prize Fund Investments 60,000
Creditors for 7,000 Subscription Receivable 23,750
Sports Materials (i.e. outstanding)
Subscription Received in 7,000 Stock of Sports Materials 20,000
Advance Outstanding Miscellaneous Expenses 3,750
Expenses: Paid in Advance
Rent 3,750 Cash in hand 24,000
Miscellaneous 11,400 15,150
Expenses
3,31,500 3,31,500

Balance Sheet of Entertainment as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital fund 2,42,350 Furniture:
Add: Surplus 95,600 Opening balance 2,00,000
Entrance fees 20,000 3,57,950 Additions 40,000
Prize fund 60,000 2,40,000
Add: Donations 14,000 Less: Depreciation 24,000 2,16,000
Interest received 1,500 5% Prize fund investments 60,000
Interest accrued* 1,500 Subscription receivable
77,000 (i.e. Outstanding):
Less: Prizes awarded 20,750 56,250 (2013-2014) 500
Creditors for sports materials 14,750 (2014-2015) 17,000 17,500
Subscription received in advance 13,000 Stock of sports materials 25,000
Outstanding miscellaneous 20,100 Miscellaneous expenses 4,250
expenses Paid in advance
Prepaid rent 3,750
Accrued interest on 1,500
Prize fund investments
Cash in hand 1,34,050

4,62,050 4,62,050

Note: * Interest on Prize Fund Investments @ 5% amounts to Rs. 3,000 whereas only
Rs. 1,500 have been received; so the balance is treated as Accrued interest.

It is preferable to prepare separate accounts of various items involving

many transactions. In this case Account for Subscription, Miscellaneous
Expenses, and Sports Materials may be made as a Classroom activity.

2015-16
Accounting for Not-for-Profit Organisation 47

Illustration 17
Shiv-e-Narain Education Trust provides the information in regard to Receipt
and Payment Account and Income and Expenditure Account for the year ended
March 31st 2015:
Receipt and Payment Account for the year ending March 31, 2015

Receipts Amount Payments Amount

(Rs.) (Rs.)
Cash in hand as on 3,000 Printing and Stationery 6,000
April 1, 2014 Lighting & Water 2,600
Cash at bank as on 15,000 Rent 21,000
April 1, 2014 Advertisement 2,820
Subscription: Miscellaneous Expenses 4,400
2013-14 12,000 Staff Salaries 85,000
2014-15 46,000 Furniture purchased 28,000
2015-16 15,600 73,600 Honorarium 15,000
Entrance fees 25,200 Books 5,000
Tuition fees: Cash in hand as on 9,180
2014-15 80,000 March 31, 2015
2014-15 10,000 90,000 Cash at bank as on 45,000
Interest on investment: March 31, 2015
2013-14 4,000
2014-15 6,000 10,000
Miscellaneous receipts 7,200
2,24,000 2,24,000

On March 31, 2015 the following balances appeared:

Investments Rs.1, 60,000; Furniture Rs.40, 000; and Books Rs.20, 000.
Income and Expenditure Account
for the year ending on March 31, 2015
Expenditure Amount Income Amount
(Rs.) (Rs.)
Printing and Stationery 7,800 Subscription 46,000
Lighting & Water 2,600 Interest on investment 6,800
Rent 24,000 Miscellaneous incomes 7,200
Staff salaries 84,000 Tuition fees 90,000
Advertisement 3,200
Honorarium 15,000
Misc. expenses 4,400
Depreciation on furniture 4,000
Surplus(Excess of income 5,000
over expenditure)
1,50,000 1,50,000

Prepare opening and closing balance sheet

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48 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Solution
Shiv-e-Narain Education Trust
Balance Sheet a s on March 31, 2014
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital/General Fund 2,54,000 Investments 1,60,000
(Balancing figure) Furniture 40,000
Books 20,000
Outstanding subscription 12,000
Accrued Interest on Invest. 4,000
Cash in hand 3,000
Cash at bank 15,000

2,54,000 2,54,000

Balance Sheet of Shiv-e-Narain Education Trust as on March 31, 2015

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Tuition fee advance 10,000 Investments 1,60,000
Rent Outstanding 3,000 Furniture 40,000
Advertisement Outstanding 380 Less: Depreciation 4,000
Printing & Stationery 1,800 36,000
Outstanding Add: Purchases 28,000 64,000
Advance Subscription 15,600 Books 20,000
Capital/ Add: Purchases 5,000 25,000
General Fund 2,54,000 Interest Accrued 800
Add Entrance fee 25,200 Outstanding tuition fee 10,000
Add Surplus 5,000 2,84,200 Staff Salary Advance 1,000
Cash in Hand 9,180
Cash at Bank 45,000
3,14,980 3,14,980

Note:
1. Income and Expenditure Account for the current year shows interest on
investment income Rs.6,800 while Receipts and Payments Account shows
the receipts of Rs.6,000 the difference of Rs.800 means interest on
investment has become due but not yet receivable during the year.
2. Income and Expenditure Account shows Rs.90,000 as income from Tuition
fees. However, the Receipts and Payments Account shows Rs.10,000 as
tuition fees received for the year 2015-16 and Rs.80,000 for 2014-15. It
implies that Rs.10,000 on account of tuition fees for the year 2014-15 are
still receivable (i.e. Tuition fees are outstanding).
3. Receipt and Payment Account shows a payment of Rs.85,000 on account of
staff salaries, but the Income and Expenditure Account shows expenditure

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Accounting for Not-for-Profit Organisation 49

of Rs.84,000 on account of staff salaries. It means the excess of Rs.1,000

shown in the Receipt and Payment Account may either belong to the
pervious year or the next year. Their is no evidence that staff salaries of
Rs.1,000 was outstanding at the end of the previous year 2013-14. This is
why this payment of Rs.1,000 has been considered as an advance salaries
to the staff.

Terms Introduced in the Chapter

1. Not-for -Profit Or ganisation.
2. Receipts and Payments Account
3. Income and Expenditure Account
4. Entrance Fee
5. Life Membership
6. Special Receipts
7. Subscription
8. Donation
9. Incidental Trading Activity
10. Legacy

Summary
1. Difference between Profit Seeking Entities and Not-for-Profit Entities: Profit-seeking
entities undertake activities such as manufacturing trading, banking and
insurance to bring financial gain to the owners. Not-for-Profit entities exist to
provide services to the member or to the society at large. Such entities might
sometimes carry on trading activities but the profits arising therefrom are used
for further the service objectives.
2. Appreciation of the need for separate Accounting Treatment for Not-for-Profit
Organisations: Since not-for -profit entities ar e guided primarily by a service
motive, the decisions made by their managers are different from those made by
their counterparts in profit-seeking entities. Differences in the nature of
decisions implies that the financial information on which they are based, must
also be different in content and presentation.
3. Explanation of the nature of the Principal Financial Statements prepare by Not-for-
Profit enterprises: Not-for -Pr ofit Organisations that maintain accounts based
on the double-entry system of accounting, generally prepare three principal
statements to fulfil their information needs. These include Receipts and
Payments Account, Income and Expenditure Account, and a Balance Sheet.
The Receipts and Payments Account is a summarised cash book which records
all cash Receipts and cash Payments without distinguishing between capital
and revenue items, and between items relating to the current year and those
relating to previous or future years.
The Income and Expenditure Account is an income statement which is prepared
to ascertain the excess of revenue income over revenue expenditure or vice

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50 Accountancy – Not-for-Profit Organisation and Partnership Accounts

versa, for a particular accounting year, as a r esult of the entity’s overall activities.
Although it is considered to be a substitute for the Trading and Profit and Loss
Account of a profit-seeking entity, there are certain conceptual differences
between the two statements. The Balance Sheet is prepared at the end of the
entity’s accounting year to depict the financial position on that date. It includes
the Capital Fund or Accumulated Fund, special purpose funds, and current
liabilities on the left hand or liabilities side, and fixed assets and current assets
on the right hand or assets side.
4. Difference between the Receipt and Payment Account and the Income and
Expenditure Account: Many differences exist between the Receipt and Payment
Account and the Income and Expenditure Account which is evident from the
nature and purpose of two statements. While the former records both capital
and revenue r eceipts and payments relating to any accounting year, the latter
records only revenue items relating to the current accounting year. Non-cash
expenses such as depreciation on fixed assets and outstanding incomes and
expenses are shown in the latter but omitted in the former. The Receipt and
Payment Account has an opening balance while the Income and Expenditure
Account does not. The closing balance of the former account represents cash
and bank balances on the closing date while in the latter account it indicates
surplus or deficit from the activities of the enterprise.
5. Conversion of a Receipt and Payment Account into an Income and Expenditure
Account: This essentially involves five steps namely, (i) adjusting the revenue
receipts on the debit side to include outstanding incomes and incomes relating
to the current year received earlier and to exclude amounts received in arrears
or in advance; (ii) adjusting revenue payments on the credit side; (iii) identifying
and showing non-cash expenses and losses on the debit side of the Income
and Expenditure Account; (iv) computing and showing profits/losses from
trading and/or social activities on the credit/debit side of the Income and
Expenditure Account; and (v) ascertaining the surplus or deficit as the closing
balance of the Income and Expenditure Account.

Questions for Practice

Short Answer Questions
1. State the meaning of ‘Not- for- Pr ofit’ Organisations.
2. State the meaning of Receipt and Payment Account.
3. State the meaning of Income and Expenditure Account.
4. What are the feature of Receipt and Payment Account?
5. What steps are taken to prepare Income and Expenditure Account from a
Receipt and Payment Account?
6. What is subscription? How is it calculated?
7. What is Capital Fund? How is it calculated?

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Accounting for Not-for-Profit Organisation 51

Long Answer Questions

1. Explain the statement: “Receipt and Payment Account is a summarised
version of Cash Book”.
2. “Income and Expenditure Account of a Not-for-Pr ofit Organisation is akin
to Profit and Loss Account of a business concern”. Explain the statement.
3. Distinguish between Receipts and Payments Account and Income and
Expenditure Account.
4. Explain the basic features of Income and Expenditure Account and of
Receipt and Payment Account.
5. Show the treatment of the following items by a not-for-profit organisation:
(i) Annual subscription
(ii) Specific donation
(iii) Sale of fixed assets
(iv) Sale of old periodicals
(v) Sale of sports materials
(vi) Life membership fee
6. Show the treatment of items of Income and Expenditure Account when
there is a specific fund for those items.
7. What is Receipt and Payment Account? How is it different from Income and
Expenditure Account?

Numerical Questions
1. From the following particulars taken from the Cash Book of a health club,
prepare a Receipts and Payments Account.
Rs.
Opening balance:
Cash in Hand 5,000
Cash at Bank 25,000
Subscriptions 1,65,000
Donations 35,000
Investment Purchased 80,000
Rent Paid 20,000
General Expenses 21,500
Postage and stationery 2,000
Courier charges 1,000
Sundry Expenses 2,500
Closing Cash in Hand 12,000
(Ans: Cash at Bank (balancing figure) Rs. 91,000)

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52 Accountancy – Not-for-Profit Organisation and Partnership Accounts

2. The Receipt and Payment Account of Harimohan charitable institution is given:

Receipt and Payment Account for the year ending March 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d Furniture 3,000
Cash at Bank 22,000 Investments 55,000
Cash in Hand 8,800 Advance for building 20,000
Donations 32,000 Charities 60,000
Subscriptions 50,200 Salaries 10,400
Endowment fund 60,000 Rent and Taxes 4,000
Legacies 24,000 Printing 1,000
Interest on Investment 3,800 Postage 300
Interest on Deposits 800 Advertisements 1,100
Sale of old newspapers 500 Insurance 4,800
Balance c/d:
Cash at bank 32,000
Cash in hand 10,500
2,02,100 2,02,100

Prepare the Income and Expenditure Account for the Year ended on March 31, 2015
after considering the following:
(i) It was decided to treat Fifty per cent of the amount received on account of
Legacies and Donations as income.
(ii) Liabilities to be provided for are:
Rent Rs. 800; Salaries Rs. 1,200; advertisement Rs. 200.
(iii) Rs. 2,000 due for interest on investment was not actually received.
(Ans : Excess of income over Expenditure Rs. 2,500.)
3. From the following particulars , prepare Income and Expenditure account:
Details Amount
(Rs.)

Fees collected, including Rs.80,000 on account of the 5,20,000

previous year
Fees for the year outstanding 30,000
Salary paid , including Rs. 5,000 on account 68,000
of the previous year
Salary outstanding at the end of the year 3,000
Entertainment expenses 8,000
Tournament expenses 25,000
Meeting Expenses 18,000
Traveling Expenses 7,000
Purchase of Books and Periodicals, including 40,000
Rs. 31,000 for purchase of Books
Rent 15,000
Postage, telegrams and telephones 6,000
Printing and Stationery 18,000
Donations received 25,000
(Ans : Excess of income over expenditure Rs. 3,07,000)

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Accounting for Not-for-Profit Organisation 53

4. Following is the information given in respect of certain items of a Sports Club.

Show these items in the Income and Expenditure Account and the Balance
Sheet of the Club:

Rs.
Sports Fund as on 1.4.2015 35,000
Sports Fund Investments 35,000
Interest on Sports Fund 4,000
Donations for Sports Fund 15,000
Sports Prizes awarded 10,000
Expenses on Sports Events 4,000
General Fund 80,000
General Fund Investments 80,000
Interest on General Fund Investments 8,000

(Ans : Balance of Sports Fund Rs. 40,000.)

5. How will you deal with the following items while preparing for the Bombay
Women Cricket Club its income and expenditure account for the year ending
31.3.2015 and its Balance Sheet as on 31.3.2015:

Rs.
(a) Donation received during the year for the 12,25,000
construction of a permanent Pavilion
Expenditure incurred up to 31.3.2015 on its construction 10,80,000
The total estimated expenditure on construction 25,00,000
of Pavilion being

(b) Tournament Fund:

Balance as on 1.4.2014 10,700
Subscriptions for tournament received during the year 65,800
Expenditure incurred during the year on conducting 72,400
tournaments

(c) Life Membership fee received during the year 28,000

Give reasons for your answers.

(Ans : (a) Balance of Pavilion Fund Rs. 1,45,000; (b) Balance of Tournment
Fund Rs. 4,100; (c) Life Membership fee to the Capitalised).

6. From the following receipts and payments and information given below, Prepare
Income and Expenditure Account and opening Balance Sheet of Adult Literacy
Orgnisation as on December 31, 2015.

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54 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Receipt and Payment Account for the year ending as on December 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d General Expenses 3,200
Cash in hand 4,000 News paper 1,850
Cash at Bank 15,550 Electricity 3,000
Subscriptions Fixed deposit with bank 18,000
2014 1,200 (on 31.06.2015) @ 10% p.a.
2015 26,500 Books 7,000
2016 500 28,200 Salary 3,600
Sale of old newspapers 1,250 Rent 6,500
Govt. grant 12,000 Postage charges 300
Sale of old furniture Furniture (purchased) 10,500
(book value Rs.5000) 3,700 Balance c/d
Interest received on FD 450 Cash in hand 3,000
Cash at bank 8,200
65,150 65,150

Information:
(i) Subscription outstanding as on 31.12.2014 Rs.2,000 and on December 31,
2015 Rs.1,500.
(ii) On December 31, 2015 Salary outstanding Rs.600, and one month Rent
paid in advance.
(iii) On Jan. 01, 2014 orgnisation owned Furniture Rs.12,000, Books Rs.5,000.
(Ans : Surplus Rs. 22,300, Opening Capital Fund Rs.38,550, Total Balance
Sheet Rs. 61,950).

7. The following is the account of cash transactions of the Nari Kalayan Samittee
for the year ended December 31, 2015:
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance from last year 2,270 Rent 6,600
Subscriptions 32,500 Electric charges 3,200
Life membership fee 3,250 Lecturer’s fee 730
Donation 2,500 Office expenses 1,480
Profit from entertainment 7,250 Printing and Stationery 1,050
Sale of old Books 750 Legal fee 1,870
(books value Rs.1,000) Books 6,500
Interest 350 Furniture purchased 8,600
Expenses on nukar drama 1,300
Cash in hand 8,040
Cash at bank 9,500
48,870 48,870

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Accounting for Not-for-Profit Organisation 55

You are required to prepare an Income and Expenditure Account after the
following adjustments:
(a) Subscription still to be received are Rs.750 , but subscription include Rs.500
for the year 2014.
(b) In the beginning of the year the Sangh owned building Rs.20,000 and
furniture Rs.3,000 and Books Rs.2,000.
(c) Provide depreciation on furniture @5% (including purchase ), books @
10% and building @ 5%.
(Ans : Surplus Rs. 24,090)
8. Following is the Receipt and Payment Account of Indian Sports Club, prepared
Income and Expenditure Account, Balance Sheet as on December 31, 2015:
Receipt and Payment Account for the year ending December 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 7,890 Salary 11,000
Subscriptions 52,000 Electric charges 5,500
Life member ship fee 2,200 Billiard Table 17,500
Entrance fee 3,200 Office expenses 4,100
Tournament fund 26,000 Printing & Stationery 2,300
Locker Rent 1,250 Tournament expenses 18,500
Sale of old sports goods Repair of ground 2,000
(Costing Rs.2,200) 2,500 Furniture purchased 7,700
Sale of old newspaper 750 Sports equipments 12,000
Legacy 37,500 Cash in hand 12,690
Cash at bank 10,000
Fixed deposit
(on 1.10.2015 for 10% p.a) 30,000
1,33,290 1,33,290

Other Information:
Subscription outstanding was on December 31, 2014 Rs.1,200 and Rs.3,200
on December 31, 2015. Locker rent outstanding on December 31, 2015 Rs.250.
Salary outstanding on December 31, 2015 Rs.1,000.
On January 1, 2015, club has Building Rs.36,000, furniture Rs.12,000,
Sports equipments Rs.17,500. Depreciation charged on these items @ 10%
(including Purchase).
(Ans : Surplus Rs.26,300, Opening Capital fund Rs.74,590, Total of Closing
Balance Sheet Rs.1,49,090)
9. From the following Receipt and Payment Account of Jan Kalyan Club, prepare
Income and Expenditure Account and Balance Sheet for the year ending
March 31, 2015.

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56 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Receipt and Payment Account

for the year ending March 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Cash in hand as on 1.4.14 6,800 Salaries 24,000
Subscription 60,200 Traveling Expenses 6,000
Donation 3,000 Stationery 2,300
Sale of furniture 4,000 Rent 16,000
(Book value Rs.6000) Repair 700
Entrance fee 800 Books purchased 6,000
Life membership fee 7,000 Building purchased 30,000
Interest on investment 5,000 Cash in hand as 31.03.2015 1,800
(@ 5% for full year)
86,800 86,800

Additional Information:
As on As on
01.04.2014 31.03.2015

(i) Subscription received in advance 1,000 3,200

(ii) Outstanding subscription 2,000 3,700
(iii) Stock of stationery 1,200 800
(iv) Books 13,500 16,500
(v) Furniture 16,000 8,000
(vi) Outstanding rent 1,000 2,000
(Ans : Surplus Rs.11,100 ,Opening Capital fund Rs.1,37,000, Total of Closing
Balance Sheet Rs.1,60,800]

10. Receipt and Payment Account of Shankar Sports club is given below, for the
year ended March 31, 2015
Receipt and Payment Account
for the year ending March 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Opening Cash in hand 2,600 Rent 18,000
Entrance fees 3,200 Wages 7,000
Donation for building 23,000 Billiard table 14,000
Locker rent 1,200 Furniture 10,000
Life membership fee 7,000 Interest 2,000
Profit from entertainment 3,000 Postage 1,000
Subscription 40,000 Salary 24,000
Cash in hand 4,000
80,000 80,000

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Accounting for Not-for-Profit Organisation 57

Prepare Income and Expenditure Account and Balance Sheet with help of
following Information:
Subscription outstanding on March 31, 2014 is Rs.1, 200 and Rs.2, 300 on
March 31, 2015, opening stock of postage stamps is Rs.300 and closing stock
is Rs. 200, Rent Rs.1, 500 related to 2005 and Rs.1, 500 is still unpaid.
On April 1, 2014 the club owned furniture Rs.15, 000, Furniture valued at
Rs. 22,500
On March 31, 2015, the club took a loan of Rs.20,000 (@ 10% p.a) in 2014.
(Ans : Deficit Rs.8,100, Opening Capital fund Deficit Rs.2,400, Total of Closing
Balance Sheet Rs. 53,500)
11. Prepare Income and Expenditure Account and Balance Sheet for the year ended
December 31, 2015 from the following Receipt and Payment Account and
Balance Sheet of culture club:
Receipt and Payment Account
for the year ending March 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Opening cash balance 12,000 Furniture 4,000
Subscription Telephone expenses 800
2013-14 2,000 Salary
2014-15 22,000 24,000 2013-14 1,000
Entrance fees 2,800 2014-15 4,000
Locker rent 1,000 Newspapers 700
Life membership fee 1,200 Sundry expenses 1,000
Government grant 11,000 Defence bonds 18,000
Land 20,000
Closing cash balance 2,500
52,000 52,000

Balance Sheet for the year ending March 31, 2014

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Advance locker rent 200 Cash in hand 12,000
Subscription received in 1,000 Outstanding expenses 3,000
Advance Building 35,000
Outstanding salary 2,000
Loan 10,000
Capital fund 36,800
50,000 50,000

(Ans : Surplus Rs.31500, Total of Closing Balance Sheet Rs.80500)

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58 Accountancy – Not-for-Profit Organisation and Partnership Accounts

12. From the following Receipt and Payment Account prepare final accounts of a
Unity Club for the year ended March 31, 2015
Receipt and Payment Accounts for the year ending March 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 15,000 Furniture 18,000
Sale of Old furniture Library books 10,000
(costing Rs. 6,000) 4,000 Salaries 72,000
Subscriptions: General expenses 18,000
2014-15 18,000 Electric charges 12,000
2015-16 60,000 Newspapers 33,800
2016-17 12,000 90,000 Postage 3,000
Sale of old newspapers 10,800 Stationery 40,000
Profit from entertainment 44,000 Audit fee 8,000
Rent 84,000 Balance c/d 33,000
2,47,800 2,47,800

Balance Sheet as on March 31, 2014

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Outstanding Salary 6,000 Cash 15,000
Capital Fund 6,94,000 Outstanding subscription 18,000
Library Books 30,000
Furniture 37,000
Land and Building 6,00,000
7,00,000 7,00,000

Additional Information:
1. The Club had 500 members each paying an annual subscription of Rs. 150.
2. On 31.3.2015 salaries outstanding amounted to Rs. 1,200 and salaries paid
included Rs. 6,000 for the year 2013-14.
3. Provide 5% depreciation on Land and Building.
(Ans : Surplus Rs.14,000 Total of Closing Balance Sheet Rs.7,27,000)

13. Following is the information in respect of certain items of a Sports Club. You
are required to show them in the Income and Expenditure Account and the
Balance Sheet.

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Accounting for Not-for-Profit Organisation 59

Details Amount
(Rs.)
Sports Fund as on April 1, 2015 80,000
Sports Fund Investments 80,000
Interest on Sports Fund Investments 8,000
Donations for Sports Fund 30,000
Sports Prizes awarded 16,000
Expenses on Sports Events 7,000
General Fund 2,00,000
General Fund Investments 2,00,000
Interest on General Fund Investments 20,000

14. Receipt and Payment Account of Maitrey Sports Club showed that Rs. 68,500
were received by way of subscriptions for the year ended on March 31, 2016.
The additional information was as under:
1. Subscription Outstanding as on March 31, 2015 were Rs. 6,500,
2. Subscription received in advance as on March 31, 2015 were Rs. 4,100,
3. Subscription Outstanding as on March 31, 2016 were Rs. 5,400,
4. Subscription received in advance as on March 31, 2016 were Rs. 2,500.
Show how that above information would appear in the final accounts for the
year ended on March 31, 2016 of Maitrey Sports Club.
(Ans : Subscription credited to Income and Expenditure Account for the year
ended on March 31, 2016 is Rs. 69,000. Subscription Outstanding as on
31.3.2016 is Rs. 5,400 and should be shown on the assets side of the Balance
sheet as on March 31, 2016 and subscriptions of Rs. 2,500 received in advance
as on March 31, 2016 on the liabilities side of the balance sheet as on March
31, 2016)

15. Following is the Receipt and Payment account of Rohatgi Trust :

Receipt and Payment Account for the year ending December 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Cash in hand 14,000 Rent 6,000
Cash at bank 60,000 Salary 12,000
Subscription: Postage 300
2014 5,000 Electricity charges 6,000
2015 83,000 Purchase of furniture 20,000
2016 3,000 91,000 Books 3,000
Sale of investment 90,000 Defence Bonds 1,50,000
Interest on investment 2,000 Help to needy students 22,000
Sale of furniture 3,200 Cash in hand 10,900
(book value Rs.3,000) Cash at bank 30,000
2,60,200 2,60,200

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60 Accountancy – Not-for-Profit Organisation and Partnership Accounts

Prepare Income and expenditure account for the year ended December 31,
2015, and a balance sheet as on that date after the following adjustments:
Subscription for 2013, still owing were Rs. 7,000. Interest due on defence
bonds was Rs.7,000, Rent still owing was Rs. 1,000. The Book value of investment
sold was Rs. 80,000, Rs. 30,000 of the investment were still in hand. Subscription
received in 2013 included Rs. 400 from a life member. The total furniture on
January 1, 2015 was worth Rs.12,000. Salary paid for the year 2014 is
Rs.2,000.
(Ans : Surplus Rs. 59,900, Total of Closing Balance Sheet Rs. 2,68,900)
16. Following Receipt and Payment Account was prepared from the cash book of
Delhi Charitable Trust for the year ending December 31, 2015
Receipt and Payment Account for the year ending December 31, 2015
Receipts Amount Payment Amount
(Rs.) (Rs.)
Balance b/d Charity 11,500
Cash in hand 11,500 Rent and taxes 3,200
Cash at bank 12,600 Salary 6,000
Donation 9,000 Printing 600
Subscription: 42,800 Postage 300
Legacies 18,000 Advertisements 4,500
Interest on investment 4,500 Insuranc es 2,000
Sale of old newspapers 200 Furniture 21,600
Investment 23,000
Balance c/d:
Cash in hand 9,900
Cash at bank 16,000
98,600 98,600

Prepare Income and expenditure account for the year ended December 31,
2014, and a balance sheet as on that date after the following adjustments:
(a) It was decided to treat one-third of the amount received on account of
donation as income.
(b) Insurance premium was paid in advance for three months.
(c) Interest on investment Rs.1,100 accrued was not received.
(d) Rent Rs.600: salary Rs.900 and advertisement expenses Rs.1,000
outstanding as on December 31, 2015.
(Ans : Surplus Rs.21,500, Total of Closing Balance Sheet Rs.72,100)

17. From the following Receipt and Payment Account of a club, prepare Income
and Expenditure Account for the year ended December 31, 2015 and the Balance
Sheet as on that date.

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Accounting for Not-for-Profit Organisation 61

Receipt and Payment Account for the year ending December 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 3,500 General expenses 900
Subscription: Salary 16,000
2014 2,000 Postage 1,300
2015 70,000 Electricity charges 7,800
2016 3,000 75,000 Furniture 26,500
Sale of old Books 2,000 Books 13,000
(costing Rs.3,200) Newspapers 600
Rent from use of hall 17,000 Meeting expenses 7,200
Sale of newspapers 400 T.V. set 16,000
Profit from entertainment 7,300 Balance c/d 15,900
1,05,200 1,05,200

Additional Information:
(a) The club has 100 members each paying an annual subscription of Rs.900.
Subscriptions outstanding on December 31, 2012 were Rs.3,600.
(b) On December 31, 2015, salary outstanding amounted to Rs.1,000, Salary
paid included Rs. 1,000 for the year 2014.
(c) On January 1, 2015 the club owned land and building Rs.25,000, furniture
Rs.2,600 and books Rs.6,200.
(Ans : Surplus Rs.79,700, Total of Closing Balance Sheet Rs.1,23,800)
18. Following is the Receipt and Payment Account of Women’s Welfare Club for the
year ended December 31, 2015:
Receipt and Payment Account for the year ending December 31, 2015
Receipts Amount Payments Amount
(Rs.) (Rs.)
Balance b/d 7,250 Salary 12,500
Subscriptions 81,750 Stationery 1,700
Donations 3,000 Electricity charges 9,550
Grant from Government 15,000 Insurance 7,500
Sale of newspapers 300 Equipments 30,000
Proceeds of charity show 16,500 Petty expenses 500
Interest on investments 7,000 Expenses on charity show 12,900
@ 10% for full year Newspapers 1,000
Sundries income 400 Lectures fee 16,500
Honorarium to Secretary 12,000
Balance c/d 27,050
1,31,200 1,31,200

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Additional Information:
01.01.2015 31.12.2015
Rs. Rs.
Outstanding salaries 1,200 1,800
Insurance prepaid 700 300
Subscription outstanding 3,750 2,500
Subscription received in advanced 1,750 1,000
Electricity charges outstanding — 1,250
Stock of stationery 2,250 700
Equipments 25,600 50,200
Building 1,20,000 1,14,000
Prepare Income and Expenditure Account for the year ended December 31,
2015 and Balance Sheet as on date.
(Ans : Surplus Rs.79,700, Total of Closing Balance Sheet Rs.1,23,800)
19. As at March 31, 2015 the following balances have been extrated from the books
of the Indian Chartered Accountants Recreation Club and you are asked to
prepare (1) Trading Account for ascertaining gross profit derived from running
resturant and dining room and (2) Income and Expenditure Account for the
year ended March 31, 2015 (3) and a Balance Sheet as at that date.
Debit Balances Credit Balances

Rs. Rs.
Stock-in-hand 1170 Receipts Dining Room 87,660
Purchases 24,660 Subscriptions 9,450
Dining Room 32,370 Billiard's Receipts 7,300
Rent 10,470 Sunday Receipts 410
Wages 18,690 Interest on Fixed Deposit 270
Repairs and Renewals 5,400 Sundry Credtiors 5310
Fuel and Light 5,280 Grant from Institute 42,000
Misc. Expenses 4,050 (permanent)
Cash in hand 560 Income and Exp. A/c 1,380
Cash at bank 2,760 (1.4.14)
Fixed Deposit 8,500
Sundry Debtors 2,250
China glass, cutlery & linen 600
Billiard Table 2,070
Fixtures and Fittings 870
Furniture 4,140
Club Premises 30,000
1,53,840 1,53,840

On March 31,2014 stock of restaurant consisted of Rs. 900 and Rs. 60

respectively. Provide depreciations Rs. 60 on fixtures and fittings, Rs. 390 on billiard
table and Rs. 560 on furniture.
(Ans: Excess of income over expenditure– Rs. 2,950: Total of Balance Sheet Rs. 51,700)

2015-16
Accounting for Not-for-Profit Organisation 63

Check-list to Test your Understanding

Test your Understanding – I
Ans. TRUE: (iii) (vi) (vii) (x); FALSE: (i) (ii) (iv).(v).(viii).(ix).
Test your Understanding – II
1. There is a specific tournament fund. The accounting treatment is as
under:
Liabilities side of the Balance Sheet Amount (Rs.)
Tournament fund 40,000
Add: Receipts from tournament 16,000
56,000
Less: Tournament Expenses 14,000
Balance to remain on the Liabilities side of 42,000
the Balance Sheet
2. There is no specific fund. So the amount incurred on Table Tennis match
expenses Rs. 4,000 would be shown on the debit side of Income and
Expenditure Account. It is the case of expenses independent of any specific
fund.
3. There is a specific fund. The accounting treatment is as under:
Liabilities side of the Balance Sheet Amount
(Rs.)
Prize Fund 22,000
Add: Interest 3,000
25,000
Less: Prizes Paid 5,000
Balance to remain on the Liabilities side of the
Balance Sheet 20,000
Prize fund Investments would appear on the Assets
Side of the Balance Sheet 18,000
4. There is no specific fund. Receipts from Charity Show would be shown
on the credit side and expenses on charity show are deducted from the
receipts and the net amount would be shown on the credit side of Income
and Expenditure Account.

2015-16
 7
Financial Statements of Electricity
Companies
Unit –1: Relevant Legal and Administrative Provisions
Learning Objectives
After studying this unit, you will be able to:
♦ Know the legal framework applicable for electricity companies.
♦ Understand the composition and purposes of various statutory authorities.
♦ Know the Regulations applicable for electricity companies.
♦ Understand the policies applicable to the Power Sector.
♦ Understand how accounting is done in electricity companies

1.1 Introduction
The electricity industry in India was guided by the Indian Electricity Act, 1910 and the
Electricity (Supply) Act, 1948. The Indian Electricity Act, 1910 introduced a licensing system
for the electricity industry and the Electricity (Supply) Act, 1948 introduced greater state
involvement in the industry, facilitating regional coordination through state-owned, vertically
integrated units called State Electricity Boards (SEBs) to develop a “Grid System”. The SEBs
were responsible for generation, transmission and distribution of electricity within each state of
the Indian Union.
In the early 1990s, the power sector was liberalised by permitting private participation in the
generation and transmission sectors and establishing regional load dispatch centres (RLDCs).
In 1998, the Electricity Regulatory Commissions Act, 1998 (the ERC Act) established
independent electricity regulatory commissions (ERC) at the central and state levels, with the
objective of rationalising the electricity tariff regime and promoting and regulating the
electricity industry. The ERC Act, which has been replaced by the Electricity Act, 2003
provided for the formation of state electricity regulatory commissions (SERCs) in the
respective states for the rationalisation of energy tariffs.

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.2

1.1.1 Historical Background of Legislative Initiatives

The Indian Electricity Act, 1910 provided basic framework for electric supply industry in
India. It made provisions for growth of the sector through licensees. The Act covered the
provisions for licence by State Government, provision for licence for supply of electricity in a
specified area, legal framework for lying down of wires and other works, provisions laying
down relationship between licensee and consumer.
The Electricity (Supply) Act, 1948 mandated creation of State Electricity Boards (SEBs) and
need for the State to step in (through SEBs) to extend electrification (so far limited to cities)
across the country. Later on this Act was amended to enable generation in Central sector and
to bring in commercial viability in the functioning of SEBs -- especially section 59 was
amended to make the earning of a minimum return of 3% on fixed assets a statutory
requirement (w.e.f. 1.4.1985). Further amendment was made in 1991 to open generation to
private sector and establishment of RLDCs and another amendment in 1998 was made to
provide for private sector participation in transmission, and also provision relating to
Transmission Utilities.
The Electricity Regulatory Commission Act, 1998 lays down the provision for setting up of
Central / State Electricity Regulatory Commission with powers to determine tariffs. Further, it
emphasized on the constitution of SERC optional for States and distancing of Government
from tariff determination.

1.2 Electricity Act, 2003

The Electricity Act, 2003 (the Electricity Act) is a central legislation relating to generation,
transmission, distribution, trading and use of electricity, that seeks to replace the multiple
legislations that governs the Indian power sector. The most significant reform initiative under
the Electricity Act was the move towards a multi-buyer, multi-seller system as opposed to the
existing structure which permitted only a single buyer to purchase power from power
generators. In addition, the Electricity Act grants the ERCs freedom in determining tariffs,
without being constrained by rate-of-return regulations. Under the Electricity Act, no licence
is required for generation of electricity if the generating station complies with the technical
standards relating to connectivity with the grid. The Electricity Act was amended in 2007 to
exempt captive power generation plants from licensing requirements for supply to any licensee
or consumer. The Electricity Act was amended in 2010 by notification dated 3 March 2010 to
provide that any developer of a special economic zone notified under the Special Economic
Zones Act, 2005 shall be deemed to be a licensee under the Electricity Act.
1.2.1 Objectives
The objectives of the Act are "to consolidate the laws relating to generation, transmission,
distribution, trading and use of electricity and generally for taking measures conducive to
development of electricity industry, promoting competition therein, protecting interest of
consumers and supply of electricity to all areas, rationalization of electricity tariff, ensuring
transparent policies regarding subsidies, promotion of efficient and environmentally benign

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 7.3 Advanced Accounting

policies, constitution of Central Electricity Authority, Regulatory Commissions and

establishment of Appellate Tribunal and for matters connected therewith or incidental thereto”.
The Electricity Act 2003 provides electricity market for private investments for increasing
generation capacity and efficient network use in India. It encourages captive generation, non-
discriminatory open access to transmission and distribution system and de-licensing
generation
Under the Electricity Act 2003, activities like generation, transmission and distribution
have been separately identified. Now, no person shall (a) transmit electricity; or (b)
distribute electricity; or (c) undertake trading in electricity, unless he is authorised to do so by
a license issued under section 14, or is exempt under section 13.
1.2.2 Licensing
The Electricity Act stipulates that no person can transmit, distribute or undertake trading in
electricity, unless he is authorised to do so by a licence issued under, or is exempt under, the
Electricity Act. The Electricity Act provides for transmission licensees, distribution licensees
and licensees for electricity trading. There can be a private distribution licensee as well.
1.2.3 Generation
As per sec 2(29), "generate" means to produce electricity from a generating station for the
purpose of giving supply to any premises or enabling a supply to be so given.
Currently, any electricity generating company can establish, operate and maintain a
generating station if it complies with the technical standards relating to connectivity with grid.
Approvals from the Government, the state government and the techno-economic clearance
from the Central Electricity Authority (CEA) are no longer required, except for hydroelectric
projects. Generating companies are now permitted to sell electricity to any licensees and
where permitted by State Electricity Regulatory Commissions (SERCs), to consumers. In
addition, no restriction is placed on the setting up of captive power plants by any consumer or
group of consumers for their own consumption. Under the Electricity Act, no surcharge is
required to be paid on wheeling of power from the captive plant to the destination of the use
by its owner. This provides financial incentive to large consumers to set up their own captive
plants. Through an amendment in 2007, Section 9 was amended to state that no separate
licence is required for the supply of electricity generated from the captive power plant to any
licensee or the consumer. The ERCs determine the tariff for the supply of electricity from a
generating company to any distribution licensee, transmission of electricity, wheeling of
electricity and retail of electricity. The Central Electricity Regulatory Commission (CERC) has
jurisdiction over generating companies owned or controlled by the Government and those
generating companies who have entered into or otherwise have a composite scheme for
generation and sale in more than one state. SERCs have jurisdiction over generating stations
within the state boundaries, except those under the CERC’s jurisdiction.

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 Financial Statements of Electricity Companies 7.4

1.2.4 Transmission
Transmission being a regulated activity involves the intervention of various players. The
Government is responsible for facilitating the transmission and supply of electricity, particularly
inter-state, regional and inter-regional transmission. The Electricity Act vests the responsibility
of efficient, economical and integrated transmission and supply of electricity with the
Government and empowers it to make regional demarcations of the country for the same. In
addition, the Government will facilitate voluntary inter-connections and coordination of facilities
for the inter-state, regional and inter-regional generation and transmission of electricity. The
CEA is required to prescribe certain grid standards under the Electricity Act and every
transmission licensee must comply with such technical standards of operation and
maintenance of transmission lines. In addition, every transmission licensee is required to
obtain a licence from the CERC and the SERCs, as the case may be.
The Electricity Act requires the Government to designate one government company as the
central transmission utility (CTU), which would be deemed as a transmission licensee.
Similarly, each state government is required to designate one government company as state
transmission utility (STU), which would also be deemed as a transmission licensee. The CTU
and STUs are responsible for transmission of electricity, planning and co-ordination of the
transmission system, providing non-discriminatory open access to any users and developing a
coordinated, efficient and integrated inter-state and intra-state transmission system
respectively. The Electricity Act prohibits the CTU and STUs from engaging in the business of
generation or trading in electricity. Under the Electricity Act, a transmission licensee may with
prior intimation to the appropriate ERC engage in any business for the optimum utilisation of
its assets.
Under the Electricity Act, the Government was empowered to establish the national load
despatch centre (NLDC) and regional load despatch centre RLDCs for optimum scheduling
and despatch of electricity among the RLDCs. The RLDCs are responsible for
(a) optimum scheduling and despatch of electricity within the region, in accordance with
the contracts entered into with the licensees or the generating companies operating in the
region;
(b) monitoring grid operations;
(c) keeping accounts of the quantity of electricity transmitted through the regional grid;
(d) exercising supervision and control over the inter-state transmission system; and
(e) carrying out real time operations for grid control and despatch of electricity within the
region through secure and economic operation of the regional grid in accordance with the grid
standards and grid code.
The transmission licensee is required to comply with the technical standards of operation and
maintenance of transmission lines specified by the CEA. The Electricity Act allows IPPs open
access to transmission lines. The provision of open access is subject to the availability of
adequate transmission capacity as determined by the CTU or STU. The Electricity Act also

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 7.5 Advanced Accounting

lays down provisions for intra-state transmission, where the state commission facilitates and
promotes transmission, wheeling and inter-connection arrangements within its territorial
jurisdiction for the transmission and supply of electricity by economical and efficient utilisation
of the electricity.
1.2.5 Trading
The Electricity Act specifies trading in electricity as a licensed activity. Trading has been
defined as the purchase of electricity for resale. This may involve wholesale supply (i.e.
purchasing power from the generators and selling to the distribution licensees) or retail supply
(i.e. purchasing from generators or distribution licensees for sale to end consumers). The
licence to engage in electricity trading is required to be obtained from the appropriate ERC.
The CERC, by notification dated 16 February 2009, issued the CERC (Procedure, Terms and
Conditions for Grant of Trading License and Other Related Matters) Regulations, 2009 (the
Trading Licence Regulations) to regulate the inter-state trading of electricity. The Trading
Licence Regulations define inter-state trading as transfer of electricity from the territory of one
state for resale to the territory of another state and includes electricity imported from any other
country for resale in any state of India. Under the Trading Licence Regulations, any person
desirous of undertaking inter-state trading in electricity shall apply to the CERC for the grant of
a licence. The Trading Licence Regulations set out various qualifications for the grant of a
licence for undertaking electricity trading, including certain technical and professional
qualifications, and net worth requirements. An applicant is required to publish notice of his
application in daily newspapers to receive objections, if any, to be filed before the CERC.
Further, a licensee is subject to certain conditions including the extent of trading margin,
maintenance of records and submission of auditors’ report. The existing licensees are required
to meet the net worth, current ratio and liquidity ratio criteria and are required to pay the
licence fee as specified by the CERC, from time to time. The eligibility criteria include norms
relating to capital adequacy and technical parameters. However, the NLDC and RLDCs,
CTUs, STUs and other transmission licensees are not allowed to trade in power, to prevent
unfair competition. The relevant ERCs also have the right to fix a ceiling on trading margins in
intra-state trading.
The CERC has issued a draft amendment to the Trading Licence Regulations dated 7 May
2012 and entitled CERC (procedure, terms and conditions for grant of trading licence and
other related matters) (First Amendment) Regulations, 2012 (the Draft TL Amendment
Regulations) under which the number categories of trading licenses have been increased from
three to four categories and the traders are additionally required to furnish information relating
to the volume of electricity proposed to be traded during fiscal 2013 supported by special
balance sheets so that the trader ’s risk may be viewed by the CERC in a more holistic
manner. The Draft TL Amendment Regulations will also introduce a code of conduct for the
trading licensees to encourage fair and transparent trading practices.

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 Financial Statements of Electricity Companies 7.6

1.2.6 Distribution and Retail Supply

The Electricity Act does not make any distinction between distribution and retail supply of
electricity. Distribution is a licensed activity and distribution licensees are allowed to
undertake trading without any separate licence. Under the Electricity Act, no licence is
required for the purposes of the supply of electricity. Thus, a distribution licensee can
undertake three activities: trading, distribution and supply, through one licence. The
distribution licensee with prior permission of the appropriate commission may engage itself in
any other activities for optimal utilisation of its assets.
1.2.7 Unregulated Rural Markets
The licensing requirement does not apply in cases where a person intends to generate and
distribute electricity in rural areas as notified by a state government. However, the supplier is
required to comply with the requirements specified by the CEA such as protecting the public
from dangers involved, eliminating or reducing the risks of injury and providing notifications of
accidents and failures of transmission and supplies of electricity. It shall also be required to
comply with system specifications for supply and transmission of electricity. The Electricity Act
mandates formulation of national policies governing rural electrification and local distribution
and rural off-grid supply including those based on renewable and other non-conventional
energy sources. This policy initiative is expected to give impetus to rural electrification and
also conceptualise rural power as a business opportunity.

1.3 Tariff Principles

The Electricity Act, 2003 has introduced significant changes in terms of tariff principles
applicable to the electricity industry. Under the Electricity Act, the appropriate ERCs are
empowered to determine the tariff for:
¾ Supply of electricity by a generating company to a distribution licensee, provided that the
appropriate commission may, in case of a shortage of supply of electricity, fix the
minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of
an agreement, entered into between a generating company and a licensee or between
licensees, for a period not exceeding one year to ensure reasonable prices of electricity;
¾ Transmission of electricity;
¾ Wheeling of electricity; and
¾ Retail of electricity, provided that in case of distribution of electricity in the same area by
two or more distribution licensees, the appropriate commission may, for promoting
competition among distribution licensees, fix only the maximum ceiling of tariff for retail of
electricity.
The appropriate ERC is required to be guided by the following while determining tariff:
• The principles and methodologies specified by the CERC for the determination of the tariff
applicable to generating companies and licensees;

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 7.7 Advanced Accounting

• That the generation, transmission, distribution and supply of electricity are conducted on
commercial principles;
• The factors which would encourage competition, efficiency, economical use of the
resources, good performance and optimum investments;
• Safeguarding consumers interest and also ensure recovery of the cost of electricity in a
reasonable manner;
• The principles rewarding efficiency in performance;
• Multi-year tariff principles;
• That the tariff progressively reflects the cost of supply of electricity, at an adequate and
improving level of efficiency;
• That the tariff progressively reduces and eliminates cross-subsidies in the manner to be
specified by the CERC;
• The promotion of co-generation and generation of electricity from renewable sources of
energy; and
• The NEP and the Tariff Policy.
The Electricity Act provides that the ERC shall adopt such tariff that has been determined
through a transparent process of bidding in accordance with the guidelines issued by the
Government. The MoP has issued detailed guidelines for competitive bidding as well as
standard bidding documents for competitive bid projects. The determination of tariff for a
particular power project would depend on the mode of participation in the project. Broadly, the
tariffs can be determined in two ways: (i) based on the tariff principles prescribed by the CERC
(cost plus basis consisting of a capacity charge, an energy charge, an unscheduled
interchange charge and incentive payments); or (ii) competitive bidding route where the tariff
is purely market based.

1.4 CERC (Terms and Conditions of Tariff) Regulations, 2009

The CERC (Terms and Conditions of Tariff) Regulations, 2009 (the CERC Tariff Regulations)
apply where the tariff for a generating station or a unit (other than those based on non-
conventional energy sources) and the transmission system is yet to be determined by the
CERC.
Tariff for the supply of electricity from a thermal generating station shall comprise two parts,
namely, capacity charge (for recovery of annual fixed cost) and energy charge (for recovery of
primary fuel cost and limestone cost (where applicable).
Tariff for the supply of electricity from a hydro generating station shall comprise capacity
charge and energy charge, for recovery of annual fixed cost through the two charges.
Tariff for transmission of electricity on the inter-state transmission system shall comprise
transmission charge for recovery of annual fixed cost.

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 Financial Statements of Electricity Companies 7.8

Tariff in respect of a generating station may be determined for the whole generating station or
a stage, unit or block of the generating station, and tariff for the transmission system may be
determined for the whole of the transmission system or the transmission line or sub-station.
For determination of tariff, the capital cost of the project may be broken into stages and
distinct units or blocks, transmission lines and sub-systems forming part of the project, if
required, provided that where break-up of the capital cost of the project for different stages,
units or blocks and transmission lines or sub-stations is not available and in case of on-going
projects, the common facilities shall be apportioned on the basis of the installed capacity of
the units, line length and number of bays and that in relation to multi-purpose hydro schemes
with irrigation, flood control and power components, the capital cost chargeable to the power
component of the scheme only shall be considered for determination of tariff.
The generating company or the transmission licensee, as the case may be, may apply for
determination of tariff in respect of units of the generating station or the transmission lines or
sub-stations of the transmission system, completed or projected to be completed within six
months from the date of the application. In the case of existing projects, the generating
company or the transmission licensee, as the case may be, shall continue to provisionally bill
the beneficiaries or the long-term customers with the tariff approved by the CERC and
applicable as on 31 March 2009 for the period starting from 1 April, 2009 until approval of tariff
by the CERC in accordance with the CERC Tariff Regulations.
The CERC (Terms and Conditions of Tariff) (Second Amendment) Regulations, 2011 specify
that, where the tariff provisionally billed exceeds or falls short of the final tariff approved by the
CERC under the CERC Tariff Regulations, the generating company, or the transmission
licensee, shall refund to (or recover from) the beneficiaries or the transmission customers
within six months, together with simple interest, at the State Bank of India base rate during the
previous year plus 350 basis points (for the years 2012 to 2013 and 2013 to 2014) for the
period from the date of provisional billing to the date of issue of the final tariff order of the
CERC monthly average.
Where an application for the determination of the tariff of an existing or a new project has
been filed before the CERC in accordance with clauses (1) and (2) of the CERC Tariff
Regulations, the CERC may consider in its discretion to grant a provisional tariff of up to 95.0
per cent. of the annual fixed cost of the project claimed in the application, subject to
adjustment as per the proviso to clause (3) of the CERC Tariff Regulations after the final tariff
order has been issued, provided that the recovery of capacity charge and energy charge or
transmission charge, as the case may be, in respect of the existing or new project for which
provisional tariff has been granted, shall be made in accordance with the relevant provisions
of the CERC Tariff Regulations.

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 7.9 Advanced Accounting

Unit 2 : Preparation of Financial Statements

Learning Objectives
After studying this unit, you will be able to:
♦ Understand relevant transaction of an electricity company such as security deposit,
capital service line contribution, Accelerated Power Development and Reforms Program
loan and grant and depreciation.
♦ Understand Reporting of financial statements of Electricity Company as per Schedule VI.
♦ Understand method of depreciation for replacement of asset i.e. the optimised
depreciated replacement cost [ODRC] method.

2.1 Formats of Financial Statements

Section 616 of the Companies Act, 1956 provides that the provisions of the Companies Act,
1956 shall not apply to companies engaged tn generation or supply of electricity except in so
far as the said provisions are inconsistent with the provisions of the Indian Electricity Act 1910
or the Electricity (Supply) Act, 1948. The Indian Electricity Act 1910 or the Electricity (Supply)
Act, 1948 have been repealed and Electricity Act, 2003 has been enacted in their place.
Accordingly in section 616 of the Companies Act instead of the Indian Electricity Act 1910 or
the Electricity (Supply) Act, 1948, the Electricity Act, 2003 can be read.
Therefore it is clear that for the companies in the business of generation or supply of
electricity, provisions of Companies Act, 1956 shall apply except in so far as the said
provisions are inconsistent with the provisions of the Electricity Act, 2003.
Electricity Act, 2003 does not prescribe any formats of financial statements to be followed by
the electricity companies. Whereas, the Companies Act, 1956 provides that every company
shall prepare its financial statements as per the Schedule VI to the Companies Act, 1956.
Therefore, the electricity companies shall be required to prepare their accounts as per the
Schedule VI to the Companies Act, 1956.

2.2 Specific Transactions of Electricity Supply Company

2.2.1 Security Deposit
As provided in section 47 of the Act, the Distribution Licensee may require from any person,
who requires a supply of electricity to his premises in pursuance of section 43 of the Act, to
deposit sufficient security against the estimated payment which may become due to him -
(1) In respect of electricity supplied to such person (including Energy Charges, Fixed /
Demand Charges, Fuel Price and Power Purchase Adjustment (FPPPA) charges, Electricity
Duty and any other charges as may be levied from time to time), or

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.10

(2) Where any electric line or electric plant or electric meter is to be provided for supplying
electricity to such person, in respect of the provision of such line or plant or meter.
(3) The distribution licensee shall pay interest equivalent to the bank rate or more, as may
be specified by the concerned State Commission, on the security referred to in sub-section
(1) and refund such security on the request of the person who gave such security.
(4) A distribution licensee shall not be entitled to require security in pursuance of clause (a)
of sub-section (1) if the person requiring the supply is prepared to take the supply through a
pre-payment meter.
Interest on Security Deposit
The Licensee shall pay interest to the consumer at the Reserve Bank of India bank rate
prevailing on the Is1 of April for the year, payable annually on the consumer's security deposit
with effect from date of such deposit in case of new connections energized after the date of
this notification, or in other cases, from the date of notification of this Code. The interest
accrued during the year shall be adjusted in the consumer's bill for the first quarter of the
ensuing financial year.
Accounting and Reporting of Security Deposit
Journal Entry Amount to be debited / credited
When security deposit is received
1. For amount received
Bank A/c Dr. Actual amount received
To Security Deposit A/c
Note: Balance of Security Deposit A/c at the end of the accounting period should be
disclosed as Non-current liability in the Balance Sheet since the same is, in substance,
not repayable within a period of 12 months from the reporting date and hence does not
satisfy any of the conditions for classifying a liability as ‘current’

Journal Entry Amount to be debited / credited

(a) Interest accrued on security deposit at the end of the accounting period
2. Interest on security deposit at bank rate or more, as may be specified by the
concerned State Commission
Interest Expense A/c Dr.
To Interest Accrued on Security Deposit A/c
Note: Balance of Interest Accrued on Security Deposit A/c at the end of the accounting
period should be disclosed as Non-current liability in the Balance Sheet since the same is,
in substance, not repayable within a period of 12 months from the reporting date and
hence does not satisfy any of the conditions for classifying a liability as ‘current’

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 7.11 Advanced Accounting

Journal Entry Amount to be debited / credited

(b) Adjustment of accrued Interest on security deposit in the consumer's bill
3. The interest accrued during the year shall be adjusted in the consumer's bill for the
first quarter of the ensuing financial year
Interest Accrued on Security Deposit A/c Dr.
To Sales Turnover

2.2.2 Advance against Depreciation (AAD)

Advance against depreciation (AAD) was an element of tariff provided under the Tariff
Regulations for 2001-04 and 2004-09 to facilitate debt servicing by the generators since it was
considered that depreciation recovered in the tariff considering a useful life of 25 years is not
adequate for debt servicing. Though this amount is not repayable to the customers by the
electricity companies, keeping in view the matching principle, and in line with the opinion of
the Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI),
this is to be treated as deferred revenue to the extent depreciation chargeable in the accounts
is considered to be higher than the depreciation recoverable in tariff in future years.
2.2.3 Accounting for Exchange Rate Variations on the Foreign Currency
Borrowings
Foreign exchange rate variation (FERV) on foreign currency loans and interest thereon is
recoverable from/payable to the customers on actual payment in line with the Tariff
Regulations. Keeping in view the opinion of the EAC of ICAI, the deferred foreign currency
fluctuation asset is to be recognised by corresponding credit to deferred income from foreign
currency fluctuation in respect of the FERV on foreign currency loans or interest thereon
adjusted in the cost of fixed assets, which is recoverable from the customers in future years on
actual repayment. This amount will be recognized as revenue corresponding to the
depreciation charge in future years.
2.2.4 Assets under 5 KM scheme of the Government of India
Ministry of Power has launched a scheme for electrification of villages within 5 km periphery of
generation plants of Central Public Sector Undertakings (CPSUs) for providing reliable and
quality power to the project affected people. The scheme provides free electricity connections
to below poverty line (BPL) households. The scheme will cover all existing and upcoming
power plants of CPSUs. The cost of the scheme will be borne by the CPSU to which the plant
belongs. This cost will be booked by the CPSU under the project cost and will be considered
by the CERC for determination of tariff.
2.2.5 Capital Service Line Contributions
Different State Commissions prescribes such Service line cum Development (SLD) Charges
norms as per section 47 of the Act. Norms of Delhi Electricity Supply Code Regulations, 2012
Chapter IV are given below for reference:

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 Financial Statements of Electricity Companies 7.12

Service line cum Development (SLD) Charges: ln case the area/colony is electrified by the
Licensee, the SLD charges shall be payable by all consumers irrespective of whether it is
electrified or un-electrified area. SLD charges, as given in Table-4, shall be leviable.
Service Line cum Development Charge
[Link]. Sanctioned Load (kW) Amount (`)
1 Upto 5 3,000
2 More than 5 upto 10 7,000
3 More than 10 upto 20 11,000
4 More than 20 upto 50 16,000
5 More than 50 upto 100 31,000
6 More than 100 kW (at 11 kV) 50% of the cost of HT
cables/line/switchgear
Accounting for this source of funds of Electricity Company requires special attention as the
following different accounting and reporting practices are noticed in published Financial
Statements of some companies.
1. Amount received from consumer towards capital/service line contributions is accounted
as liability and subsequently recognized as income over the life of the asset;
2. Amount received from consumer towards capital / service line contributions is accounted
as reserves as the amount is not refundable and reported under the head reserves and
surplus without transferring any proportionate amount to the income statement over the
life of asset;
3. Amount received from consumer towards capital / service line contributions is accounted
as capital reserve as the amount is not refundable and subsequently proportionate
amount is transferred to income statement during the expected life of the asset to match
against depreciation on total cost of such asset;
4. Amount received from consumer towards capital/service line contributions is accounted
as reduction in the cost of non-current asset and depreciation may be provided on such
reduced cost.
Accounting entry for the 3rd option is as follows
Journal Entry Amount to be debited / credited
(c) When amount received from consumers towards capital / service line contributions

4. For amount received

Bank A/c Dr. Actual amount received
To Capital / service line contributions A/c

© The Institute of Chartered Accountants of India

 7.13 Advanced Accounting

Note: Balance of capital / service line contributions A/c at the end of the accounting
period should be disclosed under Capital Reserve under “Reserves and Surplus” as in
substance it is not redeemable to consumers.

Journal Entry Amount to be debited / credited

(d) When proportionate amount is transferred to income statement during the
expected life of the asset from capital / service line contributions A/c
5. For amount received
Capital / service line contributions A/c Dr.
To Profit and Loss A/c

Note: Balance of capital / service line contributions A/c at the end of the accounting
period should be disclosed as Capital Reserve under “Reserves and Surplus” wherein this
transfer is shown as deduction. The amount transferred matches proportionately against
depreciation charged on total cost of such asset in the Statement of Profit and Loss.
Return on equity shall be computed in rupee terms, on the equity base determined in
accordance with regulation 12. Equity Base should not include the amount contributed by the
consumers towards such capital investment. Consumer contribution for such capital
investment is not brought out in the ARR .

2.3 Implementation of Accelerated Power Development and Reforms

Program (APDRP)
Government identified need for electricity distribution reforms in light of existing poor
distribution network, huge transmission and distribution losses due to un-metered supply and
theft, high LT/HT line ratio, overloaded DT/lines etc. For this Government introduced
Accelerated Power Development Program (APDP) in February, 2000.
The main objective of this program was to initiate a financial turnaround in the performance of
the state owned power sector.
Two years of working experience of APDP showed that it had several limitations. Therefore, in the
Union Budget 2002-03 APDP was re-christened as Accelerated Power Development and Reforms
Program (APDRP) with the stipulation that ‘access of the States to the fund will be on the basis of
agreed reform programmes’ the center piece of which would be narrowing and ultimate elimination
of the gap between unit cost of supply and revenue realization within a specific time frame.
2.3.1 Objectives of APDRP
APDRP has now been given much wider scope than APDP. It aims at strengthening and up-
gradation of the Sub-Transmission, and Distribution system in the country with the following
objectives:

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.14

i. Reducing Aggregate Technical and Commercial (AT&C) losses;

ii. Improving quality of supply of power;
iii. Increasing revenue collection; and
iv. Improving consumer satisfaction.
Union Government provide funds under the programme as additional central assistance over
and above the normal Central Plan Allocation to those States who commit to a time bound
programme of reforms as elaborated in the Memorandum of Understanding (MoU) and
Memorandum of Agreement (MoA). The funds under the programme are provided under two
components:
i Investment component- Assistance for strengthening and upgradation of sub-transmission
and distribution system. Focus is on high density urban areas to achieve quick result as
losses in absolute term are very high in such areas.
ii. Incentive component – It is a grant for States/Utilities to encourage them to reduce their
cash losses on yearly basis.
Investment component – Funds are provided through a combination of grant and loan. For this
purpose States have been categorized as Special Category States and Non-Special Category
States. 100% of the project cost in special category States (all North Eastern States, Sikkim,
Uttaranchal, Himachal Pradesh and Jammu & Kashmir) in the ratio of 90% grant and 10% soft loan
is financed. In respect of other States (Non-special category) Union Government finance 50% of
the project cost and the ratio of grant and loan is 1:1. SEBs and Utilities have to arrange remaining
50% of the fund from Power Finance Corporation (PFC) and Rural Electrification Corporation
(REC) or other financial institutions or from their own resources as counter-part funds.
Incentive component: - This component has been introduced to motivate SEBs/Utilities to reduce
their cash losses. State Governments are incentivised upto 50% of the actual cash loss reduction
by SEBs/ Utilities as grant. The year 2000-01 is the base year for the calculation of loss reduction,
in subsequent years. The losses are calculated net of subsidy and receivable. Funds under
incentive components are provided as 100% grant to all the States (special category and non-
special category) as Additional Plan Assistance.
The following table will make the funding modalities more clear:
% of Projects / % of Projects Scheme
[Link]. Category of States Scheme Cost Cost from PFC/REC/
from APDRP as Own/ Other Sources
Grant Loan
1 Special Category States 90 10 -
2 Non-special category States 25 25 50

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 7.15 Advanced Accounting

2.3.2 Funding Pattern

Funds under the Accelerated Power Development Reforms Programme (APDRP) are released
to the State Government as below:
i. Non-special category States:
a. 25 percent of the APDRP amount – after approval of project under APDRP and on
tie up of counterpart funds from financial institutions and release of matching fund
by financial institutions (FIs)
b. On utilization of the 25 percent of sanctioned project cost, 50 percent of the APDRP
amount is released.
c. On utilization of 75 percent of the sanctioned project cost, balance 25 percent is
released
ii. Special Category States: (namely all North-Eastern States, Sikkim, Uttaranchal,
Himachal Pradesh and Jammu & Kashmir):
a. 25 percent of the APDRP amount after approval of project
b. On utilization of 25 percent of the project cost, 50 percent of the APDRP amount is
released
c. On utilization of 75 percent of the project cost, balance 25 percent of the APDRP
amount is released
2.3.3 Accounting of Grant received under APDRP
Grant received under the Accelerated Power Development and Reforms Programme (APDRP) of
the Ministry of Power, Government of India towards capital expenditure, is treated as capital receipt
and accounted as Capital Reserve and subsequently adjusted as income (by transfer to the
Statement of Profit and Loss) in the same proportion as the depreciation written off on the assets
acquired out of the grant. The depreciation for the year debited to the statement of Profit and Loss
on asset acquired out of grant match against portion of grant transferred from Capital Reserve. The
unadjusted balance of capital reserve is disclosed under Reserves and Surplus in balance sheet.
In the Cash Flow Statement grant received under APDRP is reported under Financing Activity.
At any time if the ownership of the assets acquired, out of the grants, vest with the
Government, the grants (capital reserve) are adjusted in the carrying cost of such assets.
The grant-in-aid assistance received by the utility under APDRP and its utilisation shown
under the head capital expenditure made during the year is not considered for calculation of
Annual Revenue Requirement (ARR) of the utility for the year.

2.4 Depreciation
Depreciation requires special consideration for an electricity company for following reasons:
1. As already discussed, for the companies in the business of generation or supply of
electricity, provisions of Companies Act, 1956 shall apply except in so far as the said
provisions are inconsistent with the provisions of the Electricity Act, 2003.

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 Financial Statements of Electricity Companies 7.16

2. The rates of depreciation has been prescribed by the Central Electricity Regulatory
Commission (CERC) under the tariff regulations, 2009 which has been notified under the
powers given under the Electricity Act, 2003.
3. The rates of depreciation as prescribed by CERC for the purpose of tariff are different
from those prescribed under Schedule XIV to the Companies Act, 1956;
4. As per 2004 Regulations, the Central Electricity Regulatory Commission has observed
that different rates of depreciation are already being allowed for the purpose of accounts and
income-tax. This being so, following different depreciation rates for the purpose of tariff was
considered fully justified.
5. As per 2009 Regulations, it has been stated in the Tariff Policy that the depreciation
rates for the assets shall be specified by the Central Electricity Regulatory Commission and
this rate of depreciation shall be applicable for the purpose of tariff as well as accounting.
6. The Office of the Comptroller & Auditor General of India has expressed an opinion that
power sector companies shall be governed by the rates of depreciation notified by the CERC
for providing depreciation in respect of generating assets in the accounts instead of the rates
as per the Companies Act, 1956. Accordingly, a Company should revise its accounting
policies relating to charging of depreciation w.e.f. 1st April 2009 considering the rates and
methodology notified by the CERC for determination of tariff through Regulations, 2009 (Ref.
35th Annual Report for FY 2010-11 of NTPC Ltd page 59).
2.4.1 Purpose of Depreciation
For the treatment of depreciation, three views are generally expressed
• The first is that it represents a cash flow for repayment of loan;
• The second is that it represents a return of capital subscribed; and
• The third is that it represents a replacement of capital or a charge for the replacement of
the assets consumed.
As per 2004 Regulations, depreciation represents a cash flow for repayment of loan and
allowed Advance Against Depreciation. (Explained in following paragraphs).
As per 2009 Regulations, depreciation represents a cash flow for repayment of loan not by
allowing Advance against Depreciation but by prescribing higher rates of depreciation for initial
years of loan redemption explained in following paragraphs.
2.4.2 Philosophy of depreciation
The philosophy of depreciation as adopted by the Commission in the existing norms as result
of detailed study, prescribes following two methods of depreciation.
(a) The Straight Line method by application of a fixed rate over the fair life of the asset;
(b) Optimized Depreciated Replacement Cost (ODRC) based method under which the
depreciation could be a method for replacement of the asset.

© The Institute of Chartered Accountants of India

 7.17 Advanced Accounting

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.18

© The Institute of Chartered Accountants of India

 7.19 Advanced Accounting

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.20

© The Institute of Chartered Accountants of India

 7.21 Advanced Accounting

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.22

2.5 CERC (Terms and Conditions of Tariff) Regulations, 2009

Statement of Objects and Reasons
CERC has issued “CERC (Terms and Conditions of Tariff) Regulations, 2009 Statement of
Objects and Reasons”. The following are relevant observations:
1. As per the 2004 regulations. Value Base for the purpose of depreciation is historical cost
of the asset which includes additional capitalization and FERV up to 31.03.2004. Depreciation
is calculated by applying the depreciation rates notified by the Commission using Straight Line
Method over the useful life of the asset and considering salvage value of 10%. On repayment
of entire loan, the remaining depreciable value is spread over the balance useful life of the
asset. Depreciation is chargeable from the first year of operation. In case of operation of the
asset for part of the year, depreciation is charged on pro rata basis. To provide cash flow to
the utilities to make them repay their debt, Advance against Depreciation (AAD) is allowed
subject to certain conditions.
2. While determining the tariff, the Regulators have to ensure that: (i) capital is refunded to
the investors over estimated life of assets, i.e. refund of capital: (ii) capital invested in the
regulated business is allowed sufficient return so that the investors find the business attractive
enough to invest, i.e. return on investment; and (iii) reasonable amount of operation and
maintenance expenses is allowed, i.e. reimbursement of O&M expenses. And one of the major
components of capital deployed is loan. As such it is important for the Commission to ensure
availability of sufficient cash flow in the hands of the utilities to take care of the loan
repayment obligation. For the control period 2004-09, the Commission took care of this cash
flow requirement by allowing AAD, in case normative depreciation amount is not sufficient to
meet the loan repayment obligations.
3. The Commission has proposed gearing of 70% investment with 30% equity in future so
that the burden on the consumers on account of cost of capital would be reduced. From the
experience it is found that long tern loans are available for the power sector for the period 10-
15 years. In the absence of AAD, the amount of depreciation calculated as per the existing
methodology will not be enough to meet the loan repayment obligations.
4. The Commission has proposed gearing of 70% investment with 30% equity in future so
that the burden on the consumers on account of cost of capital would be reduced. From the
experience it is found that long tern loans are available for the power sector for the period 10-
15 years. In the absence of AAD, the amount of depreciation calculated as per the existing
methodology will not be enough to meet the loan repayment obligations.
5. The Tariff policy stipulates that the Commission may notify the rates of depreciation in
respect of generation and transmission assets. The depreciation rates so notified would also
be applicable for distribution with appropriate modification as may be evolved by the Forum of
Regulators. The rates of depreciation so notified would be applicable for the purpose of tariffs
as well as accounting. There should be no need for any advance against depreciation. Benefit
of reduced tariff after the assets have been fully depreciated should remain available to the

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 7.23 Advanced Accounting

consumers. It is also the responsibility of the Commission to see that sufficient cash flow is
available to the generators and transmission licenses to meet their loan obligations arising due
to high gearing.
6. As per the Accounting Standard 6 “Depreciation” (AS 6) issued by Institute of Chartered
Accountants of India, 'Useful life is the period over which a depreciable asset is expected to
be used by the enterprise'. As per section 205 and 350 of Companies Act, companies are
required to provide depreciation in the books of accounts based on the useful life of asset.
These rates are specified in Schedule XIV to the Act. However, in power sector the practice of
considering depreciation towards the repayment of loan has been in vogue for quite sometime
and has come to stay. The fact is that AAD is allowed over and above the rate arrived at on
the basis of useful life to take care of repayment of loan has not given enough incentive for
generating companies to look forward to long term loans. While on one hand it is argued that
the Indian debt market is not having depth and the availability of long term loan is limited, it is
imperative that the infrastructure companies, particularly power sector investors, who contract
a sizeable amount of funding through loan should be able to facilitate long term funding with
tenure of at least 12 years, if not more to be made available by the banks and financial
institutions. The entities should use their propensity to avail large amounts of loans with the
FIs/banks, and negotiate for long term low cost funding.
7. In a regulatory environment, the Commission has to protect the interest of the consumers
while determining tariff and at the same time it is to be seen that the investors are having
sufficient liquidity and revenue to meet then commercial commitment. Apart from paying
regular dividend to the shareholders the utilities should have sufficient liquidity to cater to the
loan repayment obligation. The Commission is aware of the burden of repayment of loan that
will accrue over the initial years of the project life. Linking depreciation to the useful life of the
assets may not provide sufficient cash flow to the utilities to meet their loan repayment
obligation. Normally, the projects are having a debt component of 50% to 70% and are
repayable over a period of 12 years. If higher depreciation is allowed over a period of initial 12
years, the debt repayment obligation can easily be met by the utilities. Once the loans are
repaid, the benefit of reduced tariff should go to the consumers.
8. Accordingly, the Commission felt that the loan repayment period be treated as 12 years
for all normative loans and accordingly this repayment period of 12 years be linked to
depreciation. For 12 years during which the loan capital would be refunded to the investors in
the form of depreciation, the rate of depreciation shall be as specified in appendix-III of the
regulation and thereafter the remaining depreciable value shall be spread over the balance
useful life of the assets.

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 Financial Statements of Electricity Companies 7.24

2.6 Comparison between depreciation as per provision of Schedule

XIV to the Companies Act, 1956 and as per tariff policy under
Electricity Supply Act, 2003.
Depreciation to be provided as per Depreciation to be provided as per tariff
Schedule XIV to the Companies Act, 1956 policy under Electricity Supply Act 2003.
1 Schedule XIV does not have specific rate Since 1948, rates of depreciation have
of depreciation that can be applied directly been specified for various assets used in
for generation, transmission and electricity business separately either by
distribution assets used in electricity Government of India or the Commission.
business. Therefore, it may not be This ensures uniformity in calculation of
possible to maintain uniformity in depreciation amongst the various utilities
calculation of depreciation amongst the in electricity business and also allows
various utilities in electricity business. This comparability.
can also affect comparability.
2 The Companies Act, 1956 also allows Under regulatory system, depreciation is
calculation of depreciation when the asset provided only when the asset is put to
is ready for use i.e. when asset is ready use.
for commercial production.
3 As per the Companies Act, 1956 in case of Under regulatory system, for
revaluation of assets, the revalued cost is determination of tariff, depreciation is
to be used for calculation of depreciation calculated on the capital cost admitted by
the Commission and does not consider
revalued cost of the asset.
4 As per Companies Act, 1956 and the Under regulatory system all spares are
notified accounting standards, spares are included in the value base for calculation
not capitalized (except in case of of depreciation
insurance spares or those acquired
alongwith the asset). Such spares are
depreciated alongwith the main asset.
Other spares acquired are normally
charged to statement of Profit and Loss as
and when consumed.
5 Depreciation rates are prescribed in The depreciation rates for different assets
Schedule XIV of the Companies Act, 1956 have been so assigned as to arrive at the
and are based on estimated useful life. weighted average rate approximating
5.28%. The depreciation rates as given in
Appendix-III of the regulation have no
bearing on the useful life of the projects
as defined in regulation 3(42).

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 7.25 Advanced Accounting

Note: Some companies engaged in generation of electricity are using the rates specified for
Plant and Machinery under ‘Continuous Process’ given in schedule XIV for their thermal
generating assets for the purpose of accounting whereas hydro generating companies and
transmission licensees are applying the depreciation rates specified by the Commission for the
purpose of accounting as well as tariff.

2.7 2009 Regulations

These regulations may be called the Central Electricity Regulatory Commission (Terms and
Conditions of Tariff) Regulations, 2009 has also maintained the first view that Depreciation
represents cash flow for the repayment of loan in a modified form as compared to 2004
regulation.
2.7.1 Depreciation provisions as per CERC Regulations, 2009
Regulation 17 of the CERC Regulations, 2009 provides the provisions related to the
depreciation. It states the following:
1. The value base for the purpose of depreciation shall be the capital cost of the asset
admitted by the Commission.
2. The salvage value of the asset shall be considered as 10% and depreciation shall be
allowed up to maximum of 90% of the capital cost of the asset. (This is at variance from
Companies Act, 1956 where the salvage value is considered as 5% and the
depreciation is allowed up to maximum of 95% of the capital cost of the asset)
Provided that in case of hydro generating stations, the salvage value shall be as
provided in the agreement signed by the developers with the State Government for
creation of the site:
Provided further that the capital cost of the assets of the hydro generating station for
the purpose of computation of depreciable value shall correspond to the percentage of
sale of electricity under long-term power purchase agreement at regulated tariff.
3. Land other than the land held under lease and the land for reservoir in case of hydro
generating station shall not be a depreciable asset and its cost shall be excluded from
the capital cost while computing depreciable value of the asset.
4. Depreciation shall be calculated annually based on Straight Line Method and at rates
specified in Appendix-III to these regulations for the assets of the generating station
and transmission system:
Provided that, the remaining depreciable value as on 31st March of the year closing
after a period of 12 years from date of commercial operation shall be spread over the
balance useful life of the assets.
5. In case of the existing projects, the balance depreciable value as on 1.4.2009 shall be
worked out by deducting the cumulative depreciation as admitted by the Commission
upto 31.3.2009 from the gross depreciable value of the assets.

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 Financial Statements of Electricity Companies 7.26

6. Depreciation shall be chargeable from the first year of commercial operation. In case of
commercial operation of the asset for part of the year, depreciation shall be charged on
pro rata basis.

2.7.2 Appendix-III of the Regulations, 2009

The rates of depreciation are provided under Appendix-III of the Regulations, 2009 and are as
under:
Sr. Asset Particulars Depreciation
No. Rate (Salvage
Value=10%)
SLM
A Land under full ownership 0.00%
B Land under lease
(a) for investment in the land 3.34%
(b) For cost of clearing the site 3.34%
(c ) Land for reservoir in case of hydro generating station 3.34%
C Assets purchased new
(a) Pl & Machinery in generating stations
(i) Hydro electric 5.28%
(ii) Steam electric NHRB & waste heat recovery boilers 5.28%
(iii) Diesel electric and gas plant 5.28%
(b) Cooling towers & circulating water systems 5.28%
(c) Hydraulic works forming part of the Hydro
(i) Dams, Spillways, Weirs, Canals, Reinforced concrete 5.28%
flumes and syphons
(ii) Reinforced concrete pipelines and surge tanks, steel 5.28%
pipelines, sluice gates, steel surge tanks, hydraulic control
valves and hydraulic works
(d) Building & Civil Engineering works of a
(i) Offices and showrooms 3.34%
(ii) Containing thermo-electric generating plant 3.34%
(iii) Containing hydro-electric generating plant 3.34%
(iv) Temporary erections such as wooden structures 100.00%
(v) Roads other than Kutcha roads 3.34%

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 7.27 Advanced Accounting

(vi) Others 3.34%

(e) Transformers, Kiosk, sub-station equipment & other fixed
apparatus (including plant
(i) Transformers including foundations having rating of 100 5.28%
KVA and over
(ii) Others 5.28%
f Switchgear including cable connections 5.28%
g Lightning arrestor
(i) Station type 5.28%
(ii) Pole type 5.28%
(iii) Synchronous condensor 5.28%

h Batteries 5.28%
(i) Underground cable including joint boxes and disconnected 5.28%
boxes
(ii) Cable duct system 5.28%
i Overhead lines including cable support
(i) Lines on fabricated steel operating at terminal voltages 5.28%
higher than 66 KV
(ii) Lines on steel supports operating at terminal voltages 5.28%
higher than 13.2 KV but not exceeding 66 KV
(iii) Lines on steel on reinforced concrete support 5.28%
(iv) Lines on treated wood support 5.28%
j Meters 5.28%
k Self propelled vehicles 9.50%
l Air Conditioning Plants
(i) Static 5.28%
(ii) Portable 9.50%
m (i) Office furniture and furnishing 6.33%
(ii) Office equipment 6.33%
(iii) Internal wiring including fittings and apparatus 6.33%
(iv) Street Light fittings 5.28%
n Apparatus let on hire

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 Financial Statements of Electricity Companies 7.28

(i) Other than motors 9.50%

(ii) Motors 6.33%
o Communication equipment
(i) Radio and high frequency carrier system 6.33%
(ii) Telephone lines and telephones 6.33%
p I. T equipments 15.00%
q Any other assets not covered above 5.28%
It is to be noted that these rates are applicable for the first 12 years and the remaining depreciable
value as on 31st March of the year closing after a period of 12 years from date of commercial
operation shall be spread over the balance useful life of the assets.
Illustration 1
From the following details of assets calculate weighted average rate of depreciation
considering the rates as per Appendix-III
Particulars Closing balance at cost
Land
(a) Freehold 6,69,800
(b) Leasehold 2,15,450
Buildings 36,85,350
Railway Sidings 11,700
Plant and Machinery
(a) Steam Station 1,41,64,950
(b) Others Including "Switchgears and Transformers" 1,02,89,450
Transmission and Distributing Systems
(a) Overhead 21,21,450
(b) Underground 84,48,050
Electrical Fittings 2,50,650
and Apparatus
Furniture, Fixture and Office Equipments 3,51,800
Vehicles 1,07,400
Total 4,03,16,050

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 7.29 Advanced Accounting

Solution
Particulars Closing balance Rate of Depreciation
at cost depreciation
Land
(a) Freehold 6,69,800 0 0
(b) Leasehold 2,15,450 3.34% 7,196.03
Buildings 36,85,350 3.34% 1,23,090.69
Railway Skiing 11,700 3.34% 390.78
Plant and Machinery
(a) Steam Station 1,41,64,950 5.28% 7,47,909.36
(b) Others including "Switchgears
and Transformers" 10,289,450 5.28% 5,43,282.96
Transmission and
Distributing Systems
(a) Overhead 2,121,450 5.28% 1,12,012.56
(b) Underground 8,448,050 5.28% 4,46,057.04
Electrical Fittings and Apparatus 2,50,650 6.33% 15,866.145
Furniture, Fixture and Office
Equipments 3,51,800 6.33% 22,268.94
Vehicles 1,07,400 5.28% 5,670.72
Total (other than freehold land ) 3,96,46,250 20,23,745.535

20,23,745.535
Weighted average rate of depreciation = x 100
3,96,46,250.00
= 5.104506 %
Illustration 2
Calculate depreciation as per 2009 regulations from the following information of Barh
Generation project
(1) Date of commercial operation, i.e. 1.9.2010.
(2) The details of actual expenditure incurred up to the date of commercial operation, i.e.
1.9.2010 and projected expenditure to be incurred from the date of commercial operation
to 31.3.2014 for the assets under Barh Transmission System. The details of apportioned

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.30

approved cost as on the date of commercial operation and projected expenditure to be

incurred for the above mentioned assets is summarized below:-
Apportioned Actual cost Proposed Proposed Total
approved incurred as expenditure expenditure estimated
cost on the date from the date for 2011-12 completion
of of commercial cost
commercial operation to
operation 31.3.2011
205054.00 195054.65 30754.00 9716.00 235524.65
(3)
Average Rate of Depreciation 5.1749% 5.1650% 5.1650% 5.1650%
calculated as per rates
specified in Appendix-III
Solution
As per 2009 regulations, ''cut-off date means 31 March of the year closing after 2 years of the
year of commercial operation of the project, and in-case of the project is declared under
commercial operation in the last quarter of the year, the cut-off date shall be 31s March of the
year closing after 3 years of the year of commercial operation".
Therefore, cut-off date for the above mentioned assets is 31.3.2013.
Illustration 3
From the following information calculate:
(a) Average capital cost
(b) Return on equity
(c) Interest on loan
(d) Depreciation
as per Regulation 14 of the Central Electricity Regulatory Commission (Terms and Conditions
of Tariff) Regulations, 2009.
1. Date of commercial operation or COD = 1, April,2010
2. Approved opening Capital cost as on 1-4-2010 = ` 1,42,165.37
3. Consider weighted average rate of depreciation of 5.28%
4. Details of allowed additional capital expenditure, Weighted average rate of interest on
loan is as follows:

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 7.31 Advanced Accounting

2010-11 2011-12 2012-13 2013-14

` ` ` `
Additional capital expenditure (allowed
above) (B) 9,922.29 2,786.65 1,933.54 1,507.84

Weighted Average Rate of Interest on 7.3765% 7.4788% 7.4690% 7.5011%

Loan
Solution
a) Average capital cost
Capital Cost
2010-11 2011-12 2012-13 2013-14
` ` ` `
Opening capital cost (A) 1,42,165.37 1,52,087.66 1,54,874.31 1,56,807.85
Additional capital
expenditure (allowed
above) (B) 9,922.29 2,786.65 1,933.54 1,507.85
Closing Capital cost
(A)+(B) 1,52,087.66 1,54,874.31 1,56,807.85 1,58,315.70
Average Capital cost 1,47,126.52 1,53,480.99 1,55,841.08 1,57,561.78
b) Return on equity
Debt-Equity ratio
Debt-Equity ratio for the purpose of return on equity for the period 2010-14 is 70:30
2010-11 2011-12 2012-13 2013-14
Opening Capital cost (A) 1,42,165.37 1,52,087.66 1,54,874.31 1,56,807.86
Equity-Opening
considered now
((A)*0.30) = (B) 42,649.61 45,626.30 46,462.29 47,042.36
Additional allowable
capital expenditure (C) 9,922.29 2,786.65 1,933.54 1,507.84
Addition of Equity due
to admitted additional
capital expenditure
((C)*0.30)=(D) 2,976.69 836.00 580.06 452.35
Equity-Closing
((B)+(D))=(E) 45,626.30 46,462.29 47,042.36 47,494.71

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.32

Average equity
[(B)+(E)]/2 = (F) 44,137.95 46,044.30 46,752.33 47,268.53
Return on Equity @
23.481% of (F) 10364.03 10811.66 10977.91 11099.12
c) Interest on loan
2010-11 2011-12 2012-13 2013-14
Opening Capital cost (A) 1,42,165.37 1,52,087.66 1,54,874.31 1,56,807.86
Gross Opening loan -
considered at 70% of
(A)=(B) 99,515.76 1,06,461.36 1,08,412.02 1,09,765.50
Cumulative Repayment of
Loan upto previous year
(C) 0.00 7,768.28 15,872.08 24,100.49
Net Loan Opening (B)-
(C)=(D) 99,515.76 98,693.08 92,539.94 85,665.01
Additional capital
expenditure (allowed
above) (E) 9,922.29 2,786.65 1,933.54 1,507.84
Addition of loan due to
approved additional
capital expenditure-
considered at 70% of
(E)=(F) 6,945.61 1,950.66 1,353.48 1,055.49
Repayment of loan during
the year (net)(G) 7,768.28 8,103.80 8,228.41 8,319.26
Net Loan Closing(D)+(F)-
(G)=(H) 98,693.08 92,539.94 85,665.01 78401.24
Average
Loan{(D)+(H)}/2=I 99,104.42 95,616.51 89,102.48 82,033.12
Weighted Average Rate of
Interest on Loan (J) 7.3765% 7.4788% 7.4690% 7.5011%
Interest on Loan(I) x (J) 7310.44 7150.97 6655.06 6153.39
d) Depreciation
Weighted average rate of depreciation is considered as 5.28% and retained for the
purpose of tariff. The necessary calculations are as under.

© The Institute of Chartered Accountants of India

 7.33 Advanced Accounting

2005-06 2006-07 2007-08 2008-09

Opening capital cost 1,42,165.37 1,52,087.66 1,54,874.31 1,56,807.86
Closing capital cost 1,52,087.66 1,54,874.31 1,56,807.86 1,58,315.7
Average capital cost(A) 1,47,126.52 1,53,480.99 1,55,841.08 1,57,561.78
Weighted Average Rate
of depreciation % 0.0528 0.0528 0.0528 0.0528
Depreciation
(annualized) 7,768.28 8,103.80 8,228.41 8,319.26
Depreciable value @
90% of (A) 1,32,413.86 1,38,132.89 1,40,256.98 1,41,805.60
Cumulative depreciation 0.00 7,768.28 15,872.08 24,100.49
at the beginning
Balance depreciable 1,32,413.86 1,30,364.61 1,24,384.90 1,17,705.11
value (at the beginning)
Depreciation to be 7,768.28 8,103.80 8,228.41 8,319.26
Recovered

2.8 Additional Capital Expenditure

As per Regulation 9(1) of 2009 regulations-
"Additional Capitalization: (1) The capital expenditure incurred or projected to be incurred, on
the following counts within the original scope of work, after the date of commercial operation
and up to the cut-off date may be admitted by the Commission, subject to prudence check:
(i) Undischarged liabilities:
(ii) XXX
(iii) XXX
(iv) XXX
(v) XXX"
Additional capital expenditure of` 9999.35 lakh has been considered out of ` 30754.00 lakh for
the year 2010-11 and no further additional capital expenditure has been considered as capital
cost has been restricted to apportioned approved cost in the absence of revised capital
expenditure.
The date of commercial operation of the transmission system was 1.9.2010. Accordingly, it will
complete 12 years beyond 2013-14 and thus depreciation has been calculated annually based
on Straight Line Method and at rates specified in Appendix-Ill to the 2009 regulations.

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.34

Details of the depreciation worked out are as under-

(` in lakh)
2010-11 2011-12 2012-13 2013-14
Opening Gross Block 1,95,054.65 2,05,054.00 2,05,054.00 2,05,054.00
Addition during 2009-14 due
to Projected Additional 9,999.35 “
Capitalization 0.00 0.00 0.00
Closing Gross Block 2,05,054.00 2,05,054.00 2,05,054.00 2,05,054.00
Average Gross Block 2,00,054.33 2,05,054.00 2,05,054.00 2,05,054.00
Rate of Depreciation 5.1749% 5.1650% 5.1650% 5.1650%
Period 7 months 1 year 1 year 1 year
Depreciation 6,038.97 10,591.00 10,591.00 10,591.00
Illustration 4

Calculate depreciation as per 2009 regulations from the following information of H.B.H. Hydro
Power Generation Project
Date of commercial operation /Work Completed Date 11-Jan-95
Beginning of Current year 1-Apr-2010
Useful life 35 Years
S.N. (Figures in ` crores)
1 Capital Cost at beqinning of the Year 2010-11 110.846
2 Additional Capltiisation during the year 0.000
2011-12 0.478
2012-13 4.070
3 Value of Land 0.000
4 Depreciation recovered up to 2008-09 48.046
5 Depreciation recovered in 2009-10 3.183
Note : Capital cost at the beginning of the year accumulated depreciation are as per tariff
order FY 2010-11.
Solution
Name of the Hydro Power Station H.B.H. Hydro Power Generation
Project
Date of commercial operation /Work Completed Date 11-Jan-95
Beginning of Current year 1-Apr-10
Useful life 35 Years
Remaining Useful Life 20 Years

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 7.35 Advanced Accounting

(Figures in ` crores)
S.N. 2010-11 2011-12 2012-13
Capital cost at beqinning of the year 110.846 110.85 111.32
Additional capitalisation during the year 0.000 0.478 4.070
Closing capital cost 110.846 111.328 115.398
1 Average capital cost 110.846 111.089 113.355
Less : Value of Land 0.000 0.000 0.000
3 Capital cost for depreciation (1-2) 110.846 111.089 113.355
4 Depreciable value (90% of 3) 99.761 99.980 102.020
5 Depreciation recovered up to 2008-09 48.046
6 Depreciation recovered in 2009-10 3.183
7 Depreciation recovered upto previous year (5+6) 51.229 53.656 56.094
8 Balance depreciation to be recovered (4-7) 48.532 46.324 45.926
9 Balance useful life of 35 years 20 19 18
10 Yearly depreciation from 2010-11 (8/9) 2.427 2.438 2.551
11 Depreciation recovered upto the year (7+10) 53.656 56.094 58.645
Note : Capital cost at the beginning of the year accumulated depreciation are as per tariff
order FY 2010-11.

2.9 ODRC Method (Optimised Depreciated Replacement Cost)

Third view is that depreciation represents a replacement of capital or a charge for the
replacement of the assets consumed. This view has been evaluated by the Commission and is
as per Discussion Paper on Depreciation norms of ICRA Advisory Services(a division of ICRA
Ltd) April, 2000 mentioned in following paragraphs:
The optimised depreciated replacement cost [ODRC] method involves
(i) assessment of the gross current replacement cost of modern equivalent assets
(ii) making an adjustment for over design, over capacity and redundant assets and then,
(iii) depreciating this optimum gross current replacement cost to reflect the anticipated
effective working life of the asset from new, the age of the asset and the estimated
residual value at the end of the asset's working life.
The effective working life of an asset is the estimated life of the asset, assuming continued
use in its present function, as a part of a continuing business. The ODRC method comprises
the following steps:

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.36

1. Preparing a detailed asset register. Asset registers should contain data on quantity,
location physical condition, age and maintenance of the assets.
2. Calculation of the replacement cost. This refers to the cost of replacing the assets with
modern equivalent assets.
3. Assessment of depreciation. The new assets at replacement costs identified earlier need
to be depreciated in case the life of the existing asset is lower than the life of the new
asset.
4. System Optimisation: This is done to measure the most cost effective way of delivering
service, in terms of capacity and quality to meet the requirements. This involves three
levels;
• Capacity Optimisation both in size and number
• Optimisation of spares
• Optimisation of unit costs
Under an ODRC valuation methodology, depreciation would be greater than the capital
expenditure likely to be incurred during the proposed regulatory period when the assets that
exist in the system are old. For instance- generating machinery set up in the 70s would be due
for replacement in the present decade and a switch to the ODRC valuation basis would result
in higher depreciation charges due to higher current replacement costs.
The implementation of the ODRC would impart a significant shock to the system but this would
be more gradual than under the HC system. The shocks can be further minimised if the period
between adoption of the ODRC method and replacement of assets is spaced out. This would
therefore require an immediate implementation of the ODRC valuation method.

2.10 Recommendation
To minimise the price shocks arising as a result of the lumpiness in capital expenditure and
resultant fluctuations in depreciation, the asset valuation method adopted should to the
greatest extent reflect current economic replacement cost. This approach will also enhance
price signalling which is best done by using the ODRC valuation.
We however recommend that the historical cost be used as the basis for the short term (the
exact time frame to be arrived based on discussion between CERC and the utilities) and
thereafter shift to the ODRC method. We do not recommend an immediate shift to the ODRC
method due to
1. Problems in producing a detailed asset register
2. The absence of norms for standard lives of assets
3. The absence of construction cost estimates
4. Lack of data on future load growth

© The Institute of Chartered Accountants of India

 7.37 Advanced Accounting

The transition period should help utilities reorganise their management information systems to
provide data for the implementation of the new valuation method.
The ODRC method would be better because
1. Little attention has been paid to replacing assets in India and many of these will be due
for replacement in the coming decade. An adoption of the ODRC method will ensure that
the price shocks are gradually administered to the customers.
2. This will ensure greater acceptability to users (State Electricity Boards and their
successors) since over capacity issues will be addressed and cost reductions possible
from new technologies will be incorporated in the valuation
3. Since the valuation will reflect the cost of replacement utilities will be able to assess the
timing and financing requirements with a greater degree of certainty.

2.11 Application of Accounting Standards in Electricity Companies

The objective of financial statements is to provide information about the financial position,
performance and cash flows of an enterprise that is useful to a wide range of users in making
economic decisions. Financial statements prepared for this purpose meet the common needs
of most users.
However, financial statements do not provide all the information that users may need to make
economic decisions since
(a) these largely portray the financial effects of past events, and
(b) do not necessarily provide non-financial information.
Financial statements also show the results of the stewardship of management, or the
accountability of management for the resources entrusted to it. The users may wish to assess
the stewardship or accountability of management in order to make economic decisions; these
decisions may include, for example, whether to hold or sell their investment in the enterprise
or whether to reappoint or replace the management.
Considering the various uses and to achieve a standardised comparability of the financial
statements over a period of time or across organizations, the accounting standards have been
promulgated. The management of any company is mandated as per the Companies Act, 1956
to declare that the company has followed the Accounting Standards prescribed under section
211 of the companies Act, 1956.
Considering these issues it is important that the requirements of these Standards are complied
with in the accounting functions to the extent applicable. Although all the accounting standards
are applicable to the electricity companies, some of the specific applications have been
discussed below:

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.38

2.11.1 (AS) 2 – Valuation of Inventories

The revised standard came into effect in respect of accounting periods commencing on or
after 1.4.1999 and is mandatory in nature.
The Standard mandates the following:
1. Inventories should be valued at the lower of cost and net realisable value.
2. The cost of inventories should comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
Specific issues relating to electricity companies:
i) The unique feature of Power sector is that electricity cannot be stored and hence there
are no finished goods or work in progress in stock. The inventories would generally
comprise materials, stores and supplies and fuels. As per AS 2 these are required to be
valued at lesser of cost or Net Realisable Value (NRV). Generally, the materials, stores
and supplies and fuels are valued at cost.
ii) The cost of purchase of materials especially coal and fuel which forms major part of
inventory should include:
- All duties and taxes (except those that are subsequently recoverable from the taxing
authorities)
- Freight inwards on an actual basis.
- All expenditure attributable to bring the inventories to the current location and
condition which includes freight cost, handling cost and other direct costs (like coal
handling costs, cost of employees involved in transportation of fuel and converting it
to the consumable stage).
2.11.2 Accounting Standard (AS) 6 – Depreciation Accounting
This Standard deals with depreciation accounting and applies to all depreciable assets, except
the following items to which special considerations apply:
1. Forests, plantations and similar regenerative natural resources
2. Wasting assets including expenditure on the exploration for and extraction of minerals,
oils, natural gas and similar non-regenerative resources
3. Expenditure on research and development
4. Goodwill
5. Livestock
This statement also does not apply to land unless it has a limited useful life for the enterprise.
The depreciable amount of a depreciable asset should be allocated on a systematic basis to
each accounting period during the useful life of the asset.

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 7.39 Advanced Accounting

Specific issue relating to electricity companies:

Under the provisions of the Electricity Act, depreciation has to be provided at the rates
prescribed by the Government of India / Regulatory Commission so as to ensure that 90% of
the cost of each asset is provided for during its useful life. In respect of assets for which no
specific rates have been prescribed by the regulatory authorities depreciation shall be
provided for as per the minimum rates prescribed under Schedule XIV to the Companies Act,
1956.
The provisions regarding depreciation have already been discussed in detail.
2.11.3 Accounting Standard (AS) 9 – Revenue Recognition
This Accounting Standard is mandatory for all companies. In case of electricity companies,
significant revenues are from the sale of power. It should be ensured that the revenue from
units generated is recognised commencing 00.00 hours as on 1st April.
Power generation utility business is highly capital intensive. Adequate care should be taken to
ensure that the capital and revenue expenses are differentiated and accounted for. The
capitalisation principles should be applied as a test to ensure that the capital expenses are
accounted properly in accordance with the standard.

2.12 Miscellaneous Illustrations

Illustration 5
The trial balance of Noida Electric Supply Ltd. for the year ended 31st March, 2012 is as
below:
(` ‘000)
Particulars Dr. Cr.
Share Capital :
Equity Shares of ` 10 each 250,00
14% Preference Shares of ` 100 each 75,00
Patents and trade mark 12,52
15% Debentures 123,50
16% Term Loan 76,50
Land (additions during the year 10,25) 62,25
Building (additions during the year 25,40) 175,67
Plant & Machinery 285,29
Mains 22,62
Meters 15,75
Electrical Instrument 7,65

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.40

Office furniture 12,25

Capital reserve 25,10
Contingency reserves 60,15
Transformers 82,20
Net revenue account 26,75
Stock in hand 60,25
Sundry debtors 31,23
Contingency reserve investment 60,05
Cash & Bank 16,27
Public lamps 15,20
Depreciation fund 129,08
Sundry Creditors 32,62
Proposed dividend 60,50
859,20 859,20
During 2011-12, ` (’000) 50,00 of 14% preference shares were redeemed at a premium of
10% out of proceeds of fresh issue of equity shares of necessary amounts at a premium of
10%.
Prepare Balance Sheet as on 31st March, 2012 as per the revised Schedule VI.
Solution
Balance Sheet of Noida Electric Supply Ltd. for the year ended March 31, 2012
Particulars Note No ` ('000)
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 32,500
b Reserves and Surplus 2 11,200
2 Non-current liabilities
a Long-term borrowings 3 20,000
3 Current liabilities
a Trade Payables 3,262
b Short-term provisions 4 6,050
Total 73,012

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 7.41 Advanced Accounting

Assets
1 Non-current assets
a Fixed assets
i Tangible assets 5 54,980
ii Intangible assets 1,252
b Other non-current assets 6 6005
2 Current assets
a Inventories 6,025
b Trade receivables 3,123
c Cash and cash equivalents 1,627
Total 73,012

Notes to financial statements

` ('000)
1. Share Capital
Equity share capital
Authorised
2,500,000 Equity shares of ` 10 each 25,000
Issued & subscribed
2,000,000 Equity shares of ` 10 each 20,000
500,000 Equity shares of ` 10 each issued during the year (A) 5,000 25,000
Preference share capital
Authorised
125,000 14% Preference shares of ` 100 each 12,500
Issued & subscribed
125,000 14% Preference shares of ` 100 each 12,500
50,000 Preference shares of ` 100 each redeemed
during the year (B) (5,000) 7,500
Total (A+B) 32,500
2. Reserves and Surplus
Capital reserve 2,510
Contingency Reserve 6,015
Balance of net return A/c 2,675
Total 11,200

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.42

3. Long-term borrowings
Secured
15% Debentures 12,350
16% Term Loan (considered secured) 7,650
Total 20,000
4. Short-term provisions
Proposed dividend 6,050
Total 6,050
5. Tangible assets
Land 5,200
Addition during the year 1,025 6,225
Building 15,027
Addition during the year 2,540 17,567
Plant & Machinery
Steam Power Plant 28,529
Transformers 8,220
Mains 2,262
Meters 1,575
Public Lamps 1,520 42,106
General Equipments
Electrical Instruments 765
Office Furniture 1,225 1,990
Less: Depreciation fund (12,908)
Total 54,980
6. Other non-current assets
Contingency Reserve Investment (assumed as non-current item) 6,005
Illustration 6
Following is the Trial Balance of Torrent Power Ltd as on 31-March-2012
Particulars Dr. Cr.
` `
Share Capital Authorized:
10,00,000 Equity Shares of `10 each 1,00,00,000
Issued, Subscribed and Paid up:
2,36,225 Equity Shares of `10 each 23,62,250

© The Institute of Chartered Accountants of India

 7.43 Advanced Accounting

Service Line Contributions

As per the last Balance Sheet 11,86,800
Contributions during the year 4,32,750
Grant in Aid under Accelerated Power Development and
Reform Programme
As per the last Balance Sheet 2,46,250
Contingency Reserve
As per the last Balance Sheet 3,05,500
Tariff and Dividend Control Reserve
As per the last Balance Sheet 57,950
General Reserve
As per the last Balance Sheet 1,31,45,000
Secured Term Loans
From Financial Institutions 58,72,500
From Banks 82,20,050
Service Line and Security Deposits from Consumers 23,29,600
Term Loan from Government of India under Accelerated
Power Development and Reform Programme 2,75,150
Short Term Loan from Financial Institution 8,75,000
Loan from Bank 54,800
Closing balance of Non-current Assets
Land
(a) Freehold 6,69,800
(b) Leasehold 2,15,450
Buildings 36,85,350
Railway Skiing 11,700
Plant and Machinery
(a) Steam Station 1,41,64,950
(b) Others Including "Switchgears and Transformers" 1,02,89,450
Transmission and
Distribution Systems
(a) Overhead 21,21,450

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.44

(b) Underground 84,48,050

Electrical Fittings and Apparatus 2,50,650
Furniture, Fixture and Office Equipments 3,51,800
Vehicles 1,07,400
Intangible Assets
Software 87,400 32,300
Capital Work-in-Progress 26,88,550
Contingency Reserve Investments (Quoted)
ICICI Bonds – 2011 3,05,500
Other Investments Quoted 100
Unquoted Investment in Subsidiary Companies 39,98,050
Equity Shares AEC Cements & Constructions Limited 100
Birla Sun Life Cash Plus 2,06,800
Kotak Floater Short Term 3,10,250
Interest Accrued on Investments 1,050
Debts / Receivables
Secured - Considered Good 9,91,650
Unsecured - Considered Good 20,54,850
Considered Doubtful 5,03,050
Inventories (Coal, Oil, Stores and Spares) 13,17,250
Cash and Cheques on hand 15,800
Balances with scheduled banks
In Current Accounts 3,77,850
Fixed Deposits Accounts 42,37,350
Balances with other Banks in Current Accounts 350
Advances recoverable in cash or in kind or for value to be
received 6,50,000
Advances and Loans to Subsidiary Companies 68,850
Balance with Government Authority 5,750
Advance Tax and Tax deducted at source (Net of Provision
for Taxation) 94,400
Provision for Gratuity and other fund 2,71,900
Provision for Leave Encashment 3,33,700

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 7.45 Advanced Accounting

Provision for Taxation 96,100

Provision for Indirect Tax 52,550
Proposed Dividend 12,04,850
Provision for Corporate Dividend Tax 2,10,750
Sundry Creditors 45,06,000
Due to Subsidiary Company 23,750
Investor Education and Protection Fund (Unclaimed
Dividends) 13,700
Consumers' Benefit Account 60,050
Credit Balances of Consumers 1,63,550
Interest Accrued but not due on Loans and Security Deposits 1,04,550
Opening balance of Profit and loss account 18,93,450
Profit during the year before adjustment * 1,39,00,200
5,82,31,000 5,82,31,000
*Sservice line contribution ` 92,250 has to be transferred to Statement of Profit and Loss.
1. Transfer from Accelerated Power Development and Reform Programme 16150 to profit
and loss account
2. Provide for depreciation on tangible assets at the following rates of Appendix III
Particulars Rate of depreciation
as per Appendix
Land
(a) Freehold 0
(b) Leasehold 3.34%
Buildings 3.34%
Railway sidings 3.34%
Plant and Machinery
(a) Steam Station 5.28%
(b) Others Including "Switchgears and
Transformers" 5.28%
Transmission and Distributing Systems
(a) Overhead 5.28%
(b) Underground 5.28%
Electrical Fittings and Apparatus 6.33%
Furniture, Fixture and Office Equipments 6.33%
Vehicles 5.28%

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 Financial Statements of Electricity Companies 7.46

3. Transfer to Contingency Reserve ` 5,000 and to general reserve ` 20,00,000 from to

statement of profit and loss.
4. Loss on Contingency Reserve Investment 8,050.
5. Debts include outstanding for a period exceeding six months.
Secured
- Considered Good ` 43,400
Unsecured
- Considered Good ` 66,250
- Considered Doubtful ` 1,24,850
Make a provision for debts considered doubtful.
Prepare balance sheet as per Schedule VI and also mention the effect of adjustments on the
profit in a working note.
Solution
Balance Sheet of Torrent Power Pvt. Ltd. as on 31st March, 2012
EQUITY AND LIABILITIES Notes `
Shareholders' funds
(a) Share capital 1 23,62,250
(b) Reserves and surplus 2 28,633,055
Non-current liabilities
(a) Long-term borrowings 3 1,52,97,500
(b) Service Line and Security Deposits from Consumers 23,29,600
(c) Long-term provisions 4 6,05,600
Current liabilities
(a) Short-term borrowings 5 23,750
(b) Trade payables 6 45,06,000
(c) Other current liabilities 7 15,46,700
(d) Short-term provisions 8 3,59,400
Total 5,56,63,855
ASSETS
Non-current assets
(a) Fixed assets
(i) Tangible assets 9 3,82,92,305

© The Institute of Chartered Accountants of India

 7.47 Advanced Accounting

(ii) Intangible assets (87,400 – 32,300) 55,100

(iii) Capital work-in-progress 26,88,550
(iv) Intangible assets under development
(b) Non-current investments 10 42,95,700
Current assets
(a) Current investments 11 5,17,050
(b) Inventories (Coal, Oil, Stores…) 13,17,250
(c) Trade receivables 12 30,46,500
(d) Cash and cash equivalents 13 46,31,350
(e) Short-term loans and advances 14 8,19,000
(f) Other current assets (Int. accrued) 1,050
Total 5,56,63,855
Note to Financial Statements:
1. Share Capital
Particulars Amount
Authorised:
10,00,000 Equity shares of ` 10 each 1,00,00,000
Issued, subscribed and paid up:
2,36,225 Equity shares of ` 10 each 23,62,250
2 Reserve and surplus
Particulars Amount Amount
Capital Reserves
Service Line Contributions
As pet last Balance Sheet 11,86,800
Add: Contributions during the year 4,32,750
16,19,550
Less: Transfer to Profit and Loss Account (92,250) 15,27,300
Grant in Aid under Accelerated Power
Development and Reform Programme 2,46,250
As per last Balance Sheet
Received during the year -
2,46,250
Less: Transfer to Profit and Loss Account (16,150) 2,30,100

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.48

Statutory Reserves
Contingency Reserve
As per last Balance Sheet 3,05,500
Less: Loss on Contingency Reserve Investments (8,050)
2,97,450
Add: Transfer from Profit and Loss Account 5,000 3,02,450
Tariff and Dividend Control Reserve
As per last Balance Sheet 57,950
Other Reserves
General Reserve
As per last Balance Sheet 1,31,45,000
Add: Transfer from Profit and Loss Account 20,00,000 1,51,45,000
Profit and Loss
Opening balance of Statement of Profit and loss 1,89,3450
Profit during the year before adjustment 1,39,00,200
Less: Profit and loss Adjustments -
Add: Service line contribution 92,250
Grant in Aid under Accelerated Power Development
and Reform Program 16,150 1,08,400
1,59,02,050
Less: Contingency reserve 5,000
General reserve 20,00,000
Bad-debt reserve 5,03,050
Depreciation 20,23,745 (45,31,795) 1,13,70,255
2,86,33,055
3. Long term borrowings
Amount
Secured Term Loans
From Financial Institutions 5,872,500
From Banks 8,220,050
(i) 1,40,92,550

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 7.49 Advanced Accounting

In the absence of details of security, disclosure for the same has not been made.
Particulars Amount
Term Loan from Government of India under Accelerated Power
Development and Reform Program 2,75,150
Short Term Loan from Financial Institutions 8,75,000
Loan from Bank 54,800
(ii) 12,04,950
Total (i) + (ii) 1,52,97,500
4. Long-term provisions
Particulars Amount
Provision for Gratuity and other funds 2,71,900
Provision for Leave Encashment 3,33,700
6,05,600
5. Short Term Borrowings
Particulars Amount
Due to Subsidiary Company 23,750
6. Trade Payables
Particulars Amount
Sundry Creditors 4,506,000
7. Other current Liabilities
Particulars Amount
Investor Education and Protection Fund (Unclaimed Dividends) 13,700
Consumers' Benefit Account 60,050
Credit Balances of Consumers 1,63,550
Interest Accrued but not due on Loans and Security Deposits 1,04,550
Proposed Dividend 12,04,850
15,46,700
It is assumed that there is no current maturity of long term loans.

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.50

8. Short Term Provisions

Particulars Amount
Provision for Taxation 96,100
Provision for Indirect Tax 52,550
Provision for Corporate Dividend Tax 2,10,750
3,59,400
9. Tangible Fixed Assets
Closing bal. Provision for
Particulars Net block
At cost depreciation
Land
(a) Freehold 6,69,800 0 6,69,800
(b) Leasehold @3.34% 2,15,450 7,196.03 2,08,254
Buildings @3.34% 36,85,350 1,23,090.69 35,62,259
Railway Siding @3.34% 11,700 390.78 11,309
Plant and Machinery
(a) Steam Station @5.28% 1,41,64,950 7,47,909.36 1,34,17,041
(b) Others Including "Switchgears and
Transformers @5.28% 1,02,89,450 5,43,282.96 97,46,167
Transmission & Distributing Systems
(a) Overhead @5.28% 21,21,450 1,12,012.56 20,09,437
(b) Underground @5.28% 84,48,050 4,46,057.04 80,01,993
Electrical Fittings and Apparatus@ 6.33% 2,50,650 15,866.145 2,34,784
Furniture, Fixture and Office
Equipments@ 6.33% 3,51,800 22,268.94 3,29,531
Vehicles @ 5.28% 1,07,400 5,670.72 1,01,729
Total 4,03,16,050 2,023,745 38,292,305∗

∗
Difference is due to approximation of decimal to nearest rupee.

© The Institute of Chartered Accountants of India

 7.51 Advanced Accounting

10. Non-current investments

Particulars Amount
Contingency Reserve Investments (Quoted)
ICICI Bond - 2011 (3,05,500 – 8,050) 2,97,450
Other Investments Quoted 100
Unquoted Investment in Subsidiary Companies 39,98,050
Equity Shares AEC Cements & Constructions Limited 100
42,95,700
11. Current Investments
Particulars Amount
Unquoted
Birla Sun Life Cash Plus 2,06,800
Kotak Floater Short Term 3,10,250
5,17,050
12. Trade Receivables
Particulars Amount Amount
Debts outstanding for a period exceeding six months
Secured - Considered Good 43,400
Unsecured - Considered Good 66,250
Considered Doubtful 1,24,850
2,34,500
Other Debts
Secured - Considered Good (9,91,650 – 43,400) 9,48,250
Unsecured - Considered Good (20,54,850 – 66,250) 19,88,600
Considered Doubtful (5,03,050 – 1,24,850) 3,78,200
33,15,050
Less: Provision for Doubtful Debts (5,03,050)
30,46,500

© The Institute of Chartered Accountants of India

 Financial Statements of Electricity Companies 7.52

13. Cash and Cash equivalents

Particulars Amount
Cash and Cheques on hand 15,800
Balances with scheduled banks
In Current Accounts 3,77,850
Fixed Deposits Accounts 42,37,350
Balances with other Banks in Current Accounts 350
46,31,350
14. Short-term loans and advances
Particulars Amount
Unsecured (Considered Good Unless Otherwise Stated)
Advances recoverable in cash or in kind or for value to be received 6,50,000
Advances and Loans to Subsidiary Companies 68,850
Balance with Government Authority 5,750
Advance Tax and Tax deducted at source 94,400
8,19,000

© The Institute of Chartered Accountants of India

1.1 Introduction :
Bank business in India is governed by the banking Regulation Act 1949, which
came into force from16th March 1949. As per section 2 of this Act, provisions of
companies Act 1956, are also applicable to Banking companies. Bank is a commercial
institution, licensed to accept deposits and acts as a safe custodian of the funds of
its customers, banks are mainly concerned with receiving, collection, transferring,
buying, lending, investing, exchanging, servicing money and claims to money both
domestically and internationally. The principal activities of a bank are operating current
accounts, receiving deposits, and advancing loans.

1.2 Meaning and Definition of Bank :

As per section 5(b) of the Banking Regulation Act 1949, ‘banking’ means the
accepting, for the purpose of lending or investment, of deposits of money from the
public repayable on demand or otherwise, and withdrawable by cheque, drafts, order
or otherwise.

Section 5(c) of banking Regulation Act defines ‘banking companies’ as “any

company which transacts the business of banking in India” However the definition
given by the Act is too narrow. In modern world banking is not restricted merely to
acceptance of deposits and lending Advances. Section 6 of the Act also recognises
this fact and has accordingly laid down that in addition to the usual banking business,
a banking company may carry on any additional business as specified by section 6

1.3 Scope of banking business :

As per the provisions of section 6 of the Banking Regulation Act, 1949 a banking
company may engage in any one of the following forms of business. In addition to the
banking business. These are

1) Borrowing, raising money, advancing money either upon or without security,

dealing in bills of exchange, granting and issue of letter of credit, travellors
cheques and circular notes, selling and dealing in bullion and specie, buying
and selling of foreign exchange including foreign bank notes, dealing in stock,
shares, debenture, purchasing and selling of bonds providing of safe deposit
vaults, the collecting and transmitting of money and securities.

2
 2) Acting as an agent for any Government or local authority or any other person,
acting as an attorney on behalf of customers.

3) Contracting for public and private loans and negotiating and issuing the same.

4) Insuring, guaranteeing, underwriting any issue of any company, corporation

or association and lending of money for the purpose of such issue.

5) Carring on and transacting every kind of guarantee and indemnity business.

6) Selling any property which is acquired in satisfaction of claims.

7) Acquiring and holding any property or right in any property against any loans
connected with such security.

8) Undertaking and executing trusts.

9) Establishing and supporting any institution, funds, trusts to benefit employees

or ex-employees of company.

10) The acquisition, construction, maintenance and alteration of any building for
the purpose of the company.

11) Selling, leasing, mortgaging, disposing all or any property and rights of the
company.

12) Doing all such other things as are incidental or conductive to the promotion
or advancement of the business of the company.

13) Any other form of business which the Central Government may, by notification
in the Official Gazette, specify as a form of business.

Restriction on Bank Business -

As per section 8 of the Banking Regulation Act 1949, certain restrictions are laid
down on the business of banking company These are-

a) No banking company shall directly or indirectly deal in the buying, selling or

bartering of goods, except in connection with the realisation of security given
to or held by it.

b) No banking company can engage in any trade or buy, sell or barter goods for
others otherwise than in connection with bill of exchange, received for
collection or negotiation or with such of its business.

3
1.4 Statutory provisions of Banking Regulations Act :
1) Minimum Capital and Reserves
As per the section of 11 (2) of the Banking Regulation Act 1949, the aggregate
value of paid up capital and reserves of a banking company in corporate outside
India, shall not be less than 15 lakhs rupees, and it has a place of business in city of
Mumbai or Calcutta, then it shall not be less than 20 lakhs rupees. It should be noted
that such sum and 20% of the net profit of each year shall be kept deposited with
Reserve. Bank of India is cash or in the form of men cumbered approved securities,
or partly in cash and partly in the form of such securities.
However in case of a banking company which is incorporated in India, the
aggregate value of capital and reserves shall not be less than the stated amount
according to place of business.
2) Restriction on commission, Brokerage etc. :
No banking company shall pay out directly or indirectly by way of commission,
brokerage in any form in respect of shares issued by it, any amount exceeding 2.5%
of paid up value of shares.
3) Statutory Reserve :
According to section 17 of the banking Regulation Act, 1949, every banking
company incorporated in India shall create a reserve and transfer to it at least 20% of
its annual profit before any dividend is declared.
4) Cash Reserve :
Every banking company not being a schedule bank, has to maintain a cash reserve
of at least 3% of the total of its demand and time liabilities in India, as on last Friday
of the Second proceeding fortnight.
5) Restrictions on loans and advances :-
No banking company shall,
i) grant any loans or advances on the security of its own shares.
ii) grant any loan or advances to any of its directors, or any of the firm in which
any of its director is interested as partner, employee or manager.
6) Restriction on Payment of Dividend :
No banking company shall pay any dividend on its shares until all its capitalized
expenses have been completely written off.
4
7) Books of Accounts :
Bank has to adopt a specialized system of book-keeping which will ensure
dimidiated entry of numerous transactions and keep an internal check on the books
of accounts. For this, bank generally maintain a large number of subsidiary and
memorandum books in addition to principal books of accounts.

Principal books of accounts :

Cash book and general ledger are the principal books of accounts of any bank.
Cash book records all cash transactions and general ledger contains control accounts
of all subsidiary ledgers and different assets and liabilities account.

8) Final Accounts :
According to section 29 of the Banking Regulation Act, 1949, every banking
company is required to prepare with reference to that year a balance sheet and profit
and loss account on the last working day of the year in the Form ‘A’ and Form ‘B’
respectively as given in schedule III

1.5 Form of Balance Sheet (Vertical)

Third Schedule
(Section - 29)

Form ‘A’
Form of Balance Sheet
Balance Sheet of ........................... Bank
as on 31-3-………

Schedule Current Previous

Particulars
No. Year Year

Capital and Liabilities

Capital 1
Reserve and Surplus 2
Deposits 3
Borrowings 4
Other liabilities and provisions 5

Total
(Conted. on next page)
5
 Schedule Current Previous
Particulars
No. Year Year

Assets
Cash in hand and Balance with R.B.I. 6
Balance with other banks, money at call 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent Liabilities 12
Bills for collection

1) Capital : It is a first item of Liabilities. It’s details are given in schedule-1.

Which contain authorized capital, issued, subscribed, called up and paid up capital.

2) Reserves and Surplus : It includes statutory reserves, capital reserves, share

premium, profit and loss account balance. The details of this are given in schedule
No. 2

3) Deposits : It contains demand deposits, saving bank deposits / accounts,

term deposits. The details are given in schedule No. 3

4) Borrowings : It includes borrowings from Reserve Bank of India, borrowing

from other banks and institutions and agencies. The details about it are given in
schedule No. 4

5) Other liabilities and provisions : It includes Bills payables, Branch Office

/ interoffice adjustment credit balance, interest outstanding / accrued on deposits,
provision for taxations, Rebate on bills discounted etc. and shown in schedule No. 5

6) Cash in hand and balance with R.B.I. - It includes cash in hand including
foreign currency notes, and balance with Reserve Bank of India. Details are given in
Schedule No. 6

7) Balance with other banks, Money at call and short notice - It contains
balance with other banks, money at call and short notice. These are shown in schedule
No. 7
6
 8) Investments - Investment in Government securities, other approved securities,
investment in shares / debentures and bonds, gold are shown under this heading.
The details are given in schedule No. 8
9) Advances - It gives details about loans and advances granted by bank. It
includes loans cash credit and overdraft, Term loans, bills purchased and discounted.
The details are given in schedule No. 9
10) Fixed Assets - Premises, Furniture and Fixtures and other fixed assets are
shown under this head. The details are given in schedule No. 10.
11) Other Assets - It includes advance taxes, stationery and stamps on hand,
Branch adjustment (Dr. bal.), Interest accrued on advances, non banking assets etc.
Details are given in schedule No. 11
12) Contingent Liabilities - It indicate the liabilities which are not provided in
Balance Sheet. It includes liabilities on partly paid shares, claims against bank not
acknowledged as debts; acceptances endorsement and other obligations etc. Details
are given in schedule No. 12
13) Bills for collection - It includes bills receivables received on behalf of
customers for collection. These are shown outside the Balance Sheet.

1.6 Form of Profit and Loss Account (Vertical)

Form ‘B’
Form of Profit and Loss Account
For the year ended on 31-3-…………….
Schedule Current Previous
Particulars
No. Year Year
I. Income
Interest earned 13
Other Income 14
Total
II. Expenditure
Interest expended 15
Operating expenses
Provisions and Contingencies
Total
(Conted. on next page)

7
 Schedule Current Previous
Particulars
No. Year Year

III. Profit/ Loss

Profit /Loss brought forward (op. bal)
Net profit/loss for current year.

Total

IV. Appropriations
20% transfer to Statutory Reserve
Transfer to other reserves
Proposed Dividend/Interium Dividend
Balance carried over to
Balance Sheet.

Total

I) Income : It includes interest earned or discount received by bank on advances

or bills discounted, income on Investments, Interest on balance with R.B.I,
etc. It is shown under schedule-13

Other Income : includes commission exchange and brokerage, profit on

sale of investments, profit on revelation of assets, Dividend from subsidiaries.
These are shown in schedule No. 14.

II) Expenditure : These are shown under three different heads viz. interest
expended, operating expenses and provisions. Interest expended includes
interest paid by bank on deposits and borrowings. It is shown under schedule
No. 15. Operating Expenses of bank such as salaries and allowances to
staff and officers, Rent taxes rates, printing & stationery, Advertisement,
depreciations on bank property etc. are shown under schedule -16, Provisions
include provision made for dorebuttul debts, tax provisions and other
contingencies.

III) Profit / Loss : It shows the profit or loss balance of last year and current
year Net Profit (i.e. difference between Income and expenditures)

IV) Appropriations : Amount transferred to statutory reserve and other reserves,

proposed dividends are shown under this heading.

8
1.7 Various Schedules :
Schedule No. 1 - Capital
Particulars Current Year Previous Year
Authorised Capital
............. shares of Rs. .......each ...................
Issued Capital
............. shares of Rs. .......each ...................
Subscribed Capital
............. shares of Rs. .......each ...................
Called up capital
............. shares of Rs. .......each .............
Less : Calls in arrears .............
Add : fortified shares ............. ...................
Total
Schedule No. 2 - Reserves & Surplus
As on 31-3-....... Previous
Particulars
(Current Year) Year
I. Statutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. Capital Reserves
Opening Balance
Additions during the year
Deductions during the year
III. Shares Premium
Opening Balance
Additions during the year
Deductions during the year
IV. Revenue and other Reserves
Opening Balance
Additions during the year
Deductions during the year
V. Balance in Profit and Loss Account
Total (I+II+III+IV+V)

9
 Schedule No. 3 - Deposits

As on 31-3-....... Previous
Particulars
(Current Year) Year
A. I. Demand Deposits

(i) From banks

(ii) From others

II. Savings Bank Deposits

III. Term Deposits

(i) From banks

(ii) From others Total

(l+ll+lll)

B. (i) Deposits of branches in India

(ii) Deposits of branches

outside India

Total

Schedule No. 4 - Borrowings

As on 31-3-....... Previous
Particulars
(Current Year) Year

I. Borrowings in India

(i) Reserve Bank of India

(ii) Other banks

(iii) Other institutions and agencies

II. Borrowing outside India

Total (I + II)

Secured borrowings included in I & II

above Rs. ..................

10
 Schedule No. 5 - Other Liabilities and Provisions
As on 31-3-....... Previous
Particulars
(Current Year) Year
I. Bills payable
II. Inter-office adjustments (net) (cr.)
III. Interest accrued
IV. Others (including provisions)
Total
Schedule No. 6 - Cash & Balances with Reserve Bank of India
As on 31-3-....... Previous
Particulars
(Current Year) Year
Cash in hand
(including foreign currency notes)
Balances with RBI
(i) in Current Account
(ii) in Other Accounts
Total (I + II)
Schedule No. 7 - Balances with Banks & Money at call & short Notice
As on 31-3-....... Previous
Particulars
(Current Year) Year
India
I. Balances with banks
(a) In Current Accounts
(b) In other Deposit Accounts
II. Money at Call and Short Notice
(a) With banks
(b) With other institutions
Total
Outside India
(i) In Current Accounts
(ii) In other Deposit Accounts
(iii) Money at Call and Short Notice
Total
Total Grand Total (I + II)

11
 Schedule No. 8 - Investments
As on 31-3-....... Previous
Particulars
(Current Year) Year

Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and Bonds
(v) Subsidiaries and/or joint ventures
(vi) Others (to be specified)
Total
Investments outside India in
(i) Government securities
(including local authorities)
(ii) Subsidiaries and/or joint ventures abroad
(iii) Other investments (to be specified)
Total Grand Total (I+ 11)

Schedule No. 9 - Advances

As on 31-3-....... Previous
Particulars
(Current Year) Year

i) Bills purchased and discounted

ii) Cash credits, overdrafts and loans
repayable on demand
iii) Term loans
Total
i) Secured by tangible assets
ii) Covered by Bank/
Government guarantees
iii) Unsecured
Total

(Conted. on next page)

12
C.I. Advances in India
(i) Priority Sectors
(ii) Public Sector
(iii) Banks
(iv) Others
II. Advances Outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and discounted
(b) Syndicated loans
(c) Others
Total

Total Grand Total (C.I.+ C. II)

Schedule No. 10 - Fixed Assets

As on 31-3-....... Previous
Particulars
(Current Year) Year

I. Premises
At cost an on 31st March of the
preceding year
Additions during the year
Deductions during the year
Depreciation to date
II. Other Fixed Assets
(Including furniture & fixtures)
At cost as on 31st March of the
preceding year
Additions during the year
Deductions during the year
Depreciation to date
Total (I + II)

13
 Schedule No. 11 - Other Assets
As on 31-3-....... Previous
Particulars
(Current Year) Year
I. Inter-office adjustment (net)

II. Interest accrued

III. Tax paid in advance /tax deducted

at source

IV. Stationery and stamps.

V. Non - banking assets acquired

in satisfaction of claims

VI. Others.

Total

Schedule No. 12 - Contingent Liabilities

As on 31-3-....... Previous
Particulars
(Current Year) Year

I. Claims against the bank not

acknowledged as debts

II. Liability for partly paid investments

III. Liability on account of outstanding

forward exchange contracts.

IV. guarantees given on behalf of constituents

(a) In India

(b) Outside India

V. Acceptances, endorsements and,

other obligations

VI. Other items for which the bank is

contingently liable

Total

14
 Schedule No. 13 - Interest Earned
As on 31-3-....... Previous
Particulars
(Current Year) Year
Interest /discount on advances/bills
Income on investments
Interest on balances with
Reserve Bank of India and
other inter-bank funds
Others

Total

Schedule No. 14 - Other Income

As on 31-3-....... Previous
Particulars
(Current Year) Year

Commission, exchange and brokerage

Profit on sale f investments
Less : Loss on sale of investments
Profit on revaluation of investments
Less : Loss on revaluation
of investments
Profit on sale of land,
buildings and other assets
Less : Loss on sale of land,
buildings and other assets
Profit on exchange transactions
Less : Loss on exchange transactions
Income earned by way of dividends etc.
from subsidiaries / companies and/or
joint ventures abroad/in India
Miscellaneous Income
Total

15
 Schedule No. 15 - Interest Expended
As on 31-3-....... Previous
Particulars
(Current Year) Year
Interest on deposits

Interest on Reserve Bank of India /

Inter - bank borrowings Others

Total

Schedule No. 16 - Operating Expenses

As on 31-3-....... Previous
Particulars
(Current Year) Year

I. Payment to and provisions

for employees

II. Rent, taxes and lighting

III. Printing & Stationery

IV. Advertisement & Publicity

V. Depreciation on bank’s property

VI. Directors fees,

allowances and expenses

VII. Auditors fees and expenses

(including branch auditors
fees and expenses)

VIII. Law charges

IX. Postages, telegrams, telephones etc.

X. Repairs and maintenance

XI. Insurance

XII. Other expenditure

Total

16
1.8 R.B.I. Guidelines for Compilation of Financial Statement
Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)

Capital 1. Nationalized Banks The capital owned by Central

Capital (fully owned by Government as on the date of the
Central Government) Balance Sheet, including
contribution from Government if any,
for participating in World Bank
Projects, should be shown,
Banking Companies (i) The amount brought in by banks
incorporated outside way of start-up capital as prescribed
India. by RBI, should be shown under this
head.
(ii) The amount or deposits kept with
RBI under subsection 2 of Section
11 of the Banking Regulation Act,
1949 should also be shown.

Other Banks (Indian) Authorised, Issued, Subscribed.

Authorised capital (... Shares Called-up Capitals should be given
of Rs.... each) Issued Capital separately. Calls-in-arrears will be
(... Shares of Rs. ... each) deducted from Called-up Capital
Subscribed Capital (........... while the paid-up value of forfeited
Shares of Rs. ............. each) shares should be added, thus
Called-up Capital (............. arriving at the paid-up capital, the
Shares of Rs............. each) necessary items which can be
Less : Calls unpaid combined should be shown under
Add : Forfeited one head, for instance, “Issued and
Shares : Paid-up Capital Subscribed capital”.
Notes: General
The changes in the above items, if
any, during the years, say fresh
contribution made by the
Government, fresh issue of capital,
capitalisation of reserves, etc. may
be explained in the notes.
(Conted. on next page)

17
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Reserve 2 (I) Statutory Reserves Reserves created in terms of
and Section 17 or another section of
Surplus Banking regulation Act, must be
separately disclosed.
(II) Capital Reserves The expression ‘capital reserve’ shall
not include any amount regarded as
free for distribution through the Profit
and Loss Account. Surplus on
revaluation should be treated as
Capital Reserve. Surplus on
translation of the financial statements
of foreign branches (which includes
fixed assets also) is of a revaluation
reserve.
(III) Share Premium Premium on issue of share capital
may be shown separately under this
head.
(IV) Revenue and other The expression ‘Revenue Reserve’
Reserves shall mean any reserve other than
capital reserve. This item will include
all reserves, other than those
separately classified. This
expression ‘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.
(V) Balance of Profit Includes balance of profit after
appropriation. In case of loss the
balance may be shown as a
deduction.
Notes: General Movement in various
categories of reserves should be
shown as indicated in the schedule.

(Conted. on next page)

18
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Reserve 3 A. (I) Demand Deposits Includes all bank deposits repayable
and (i) from banks on demand. Includes all demand
Surplus (ii) from others deposits of the non-banking sectors.
(II) Saving Bank Deposits Credit balance in overdrafts, cash
credit accounts, deposits payable at
call, overdue deposits, inoperative
current accounts, matured time
deposits and cash certificates,
certificate of deposits, etc. are to be
included under this category. Includes
all savings bank deposits (including
inoperative savings bank accounts)
Includes all types of bank deposits
repayable after specified term.
(Ill) Term Deposits Includes all types of deposits of the
(i) from banks non-banking sector, repayable after
(ii) from others a specified term. Fixed deposits,
cumulative and recurring deposits,
annuity deposits, deposits mobilised
under various schemes, ordinary
staff deposits, foreign currency
nonresident deposit accounts, etc.,
are to be included under this
category.
B. (i) Deposits of branches in The total of these two items will agree
India with the total deposits.
(ii) Deposits of branches Notes : General
outside India (a) Interest payable on deposits
which is accrued but not due should
but be included but shown under
other liabilities.
(b) Matured time deposits and cash
certificates, etc., should be treated
as demand deposits.
(Conted. on next page)

19
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
(c) Deposits under special schemes
should be included under the term
deposits, if they are not payable on
demand. When such deposits have
matured for payment they should be
shown under demand deposits.
(d) Deposits from banks will include
deposits from the banking system in
India, co-operative banks, foreign
banks, which may or may not have
presence in India,

Borrow- 4 (I) Borrowings in India Includes borrowing / refinance

ings (i) Reserve Bank of India obtained from Reserve Bank of India.
(ii) Other Banks Includes borrowings / refinance
(iii) Outside Institutions and obtained from -commercial banks
agencies (including co-operative banks).
(II) Borrowings outside Includes borrowings / refinance
India obtained from Industrial Development
Secured borrowings Bank of India, Export-Import of Bank
included above. of India, National Bank for Agriculture
and Rural Development and other
institutions, agencies (including
liability against participation
certificates, if any).
Includes borrowings of Indian
branches abroad as well as
borrowing of foreign branches.
This item will be shown separately.
Includes secured borrowings/
refinance in India and outside India.
Notes: General
(i) The total of I and II will agree with
the total borrowings shown in the
Balance Sheet.
(Conted. on next page)

20
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
(ii) Inter-office transactions should
not be shown as borrowings.
(iii) Funds raised by foreign branches
by way of certificates of deposits,
notes, bonds, etc., should be
classified depending upon
documentation, as ‘deposits’,
‘borrowings’, etc.
(iv) Refinance obtained by banks
from Reserve Bank of India and
various institutions arc being brought
under the head ‘Borrowings’. Hence,
advances will be shown at the gross
amount on the assets side.

Borrow- 5 I. Bills Payable Includes drafts telegraphic transfers,

ings traveler cheques, mail transfers
payable, pay slips, bankers cheques
and other miscellaneous items.
II. Inter-office Adjustments The inter-office adjustments balance,
if the credit, should be shown under
this head. Only net position of inter-
office accounts, inland as well as
foreign, should be shown here.
III. Interest Accrued Includes interest accrued but not due
on deposits and borrowings.
IV. Others (including Includes net provision for income tax
provisions) and other taxes like interest tax (less
advance payment, tax deducted at
source etc.,) surplus in aggregate in
provisions for Bad Debts Provision
Account, surplus in aggregate in
provisions for depreciation in
securities, contingency funds which
(Conted. on next page)
21
Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
IV. Others are not disclosed as reserves but arc
(including provisions) actually in the nature of reserves but
are actually in the nature of reserves,
proposed dividend/transfer to
Government, other liabilities which
arc not disclosed under any of the
major heads such as unclaimed
dividend, provisions and funds kept
for specific purpose, unexpired
discount, outstanding charges like
rent, conveyance, etc. Certain types
of deposits like staff security
deposits margin deposits etc., where
the repayment is not free, should also
be included under this head.
Notes : General
(i) For arriving at the net balance of
inter-office adjustments all connected
inter-office accounts should be
aggregated and the net balance
should only be shown, representing
mostly items in transit and
unadjusted items.
(ii) the interest accruing on all
deposits, whether the payment is
due or not, should be treated as a
liability.
(iii) it is proposed to show only pure
deposits under the head deposits;
and hence, all surplus provisions for
bad and doubtful debts, contingency
funds, secret reserves, etc. which are
not netted off against the relative
assets, should be brought under the
head ‘others’ (including provisions).
(Conted. on next page)
22
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Cash 6. I. Cash in hand Includes cash in hand, including
and (including foreign foreign currency notes and also of
Balance currency notes) foreign branches in the case of
with the banks having such branches.
Reserve II. Balance with RBl
Bank of (i) in Current Account
India (ii) in Other Accounts
Balance 7 I. In India Includes all balance with banks in
with (i) Balance with Banks India (including co-operative
banks (a) in current accounts banks).
and (b) in other deposit accounts Balance in current accounts and
money deposit accounts should be shown
at call separately.
and (ii) Money at call and short Includes deposits repayable within
short notice 15 days notice, lent in the inter-bank
notice (a) with banks call money market.
(b) with other institutions
II. Outside India Includes balances held by foreign
(i) Current accounts branches and balances held by
(ii) Deposits Indian branches of the banks outside
(iii) Money at call and short India. Balance held with foreign
notice branches by other branches of the
bank, should not he shown under
this head but should be included in
the inter-branch accounts. The
amounts held in current accounts’
and ‘deposit accounts should be
shown separately. Includes deposits
usually classified in foreign
currencies as money at call and
short notice.

(Conted. on next page)

23
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Invest- 8. I. Investment in India Includes Central and State
ment (i) Government securities Government securities and
Government treasury bills. These
securities should be at the book
value. However, the difference
between the book value and market
value should be given in the notes to
the Balance Sheet.
(ii) Other approved securities Securities other than Government
securities, which according to the
Banking regulation Act 1949, are
treated as approved securities,
should be included here.
(iii) Shares Investment in shares of companies
and corporation not included in item
(ii) should be included here.
(iv) Debentures and Bonds Investments in debentures and
bonds of Companies, Corporations
not included in item (ii) should be
included here.
(v) Investments in sub- Investment in subsidiary/joint
sidiaries/Joint ventures ventures (including [Link]) should
be in included here.
(vi) Others Includes general investments, if any,
kike gold, commercial paper and
other instruments in the nature of
shares / debentures / bonds.
II. Investment outside lndia All foreign Government securities
(i) Government securities issued by local authorities may be
(including local classified under this head.
authorities)
All investments made in the share
capital of subsidiaries, floated

(Conted. on next page)

24
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
(ii) Subsidiaries and/or outside India and/or joint ventures
joint ventures abroad abroad, should be classified under
(iii) Others this head.
All other investments outside India by
shown under this head.
Advan- 9 A. (i) Bills purchased and In classification under Section ‘A’, all
ces Discounted outstanding in India as well as
(ii) Cash credits, overdrafts outside-less provisions made, will be
and loans repayable on classified under three heads as
demand indicated, and both secured and
(iii) Term loans unsecured advances will be included
under these heads, including overdue
installments.
B. (i) Secured by tangible All advances or part of advances
assets which are secured by tangible
asseta may be shown here. The item
will include advances in India and
outside India.
(ii) Covered by Bank/ Advances in India and outside India
Government Guarantee to the extent they are covered by
guarantees of Indian and foreign
governments and Indian and foreign
banks and DICGS & ECGC are to
be included.
(iii) Unsecured All advances not classified under (i)
and (ii) will be included here, total of
‘A’ should tally with the total of ‘B’.
C.I. Advances in India Advances should be broadly
(i) Priority sectors classified into ‘Advances in India’ and
(ii) Public sectors ‘Advances outside India’. Advances
(iii) Banks in India will be further classified on
(iv) Others the sectorial basis as indicated.

(Conted. on next page)

25
Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
II. Advances outside India Advances to sectors which for the
(i) Due form banks time being are classified as priority
(ii) Due from others sectors according to the instructions
(a) Bills purchased and of the Reserve Bank are to be
classified under the head ‘Priority
discounted
sectors’. Such advances should be
(b) Syndicated loans
excluded from the item (ii) i.e.,
(c) Others
advance to public sector. Advances
to Central and State Governments
and other Government undertakings
including Government companies
and corporations, which are,
according to the statutes, to be
treated as Public sectors companies
are to be included in the category
‘Public sectors companies are to be
included in the category ‘Public
sector’. All advances to the banking
sector including co-operative banks,
will come under the dead ‘Banks’. All
the remaining advances will be
included under the head. ‘Others’ and
typically this category will include non-
priority advances to the private, joint
and co-operative sectors. Notes:
general
(i) The gross amount of advances
including refinance and rediscounts
but excluding provisions made to the
satisfaction of auditors, should be
shown as advances. (ii) Term loans
will be loans not repayable on
demand. (iii) Consortium advances
would be shown net of share from
other participating banks/institutions.
(Conted. on next page)
26
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Fixed 10 I. Premises Premises wholly or partly owned by
Assets (i) At cost as on 31st March the banking company for the purpose
of the preceding year of business, including residential
(ii) Addition during the year premises should be shown against
(iii) Deductions during the ‘premises’. In the case of premises
year and other fixed assets, the previous
(iv) Depreciation to due balance, additions thereto,
deductions there from, during the
year, and also the total depreciation
written-off should be shown. Where
sums have been written-off on
reduction of capital and revaluation
of assets. every Balance Sheet after
the first Balance Sheet, subsequent
to the reduction or revaluation should
show the revised figures for a period
of five years, with the date and
amount of revision made.
II. Other Fixed Assets Motor vehicles and all other fixed
(including furniture and assets other than premises but
fixtures) including furniture and fixtures should
(i) At cost on 31st March of be shown under this head.
the preceding year
(ii) Additions during the year
(iii) Deductions during the year
(iv) Depreciation to date
Other 11 I. Inter-office Adjustment The inter-office adjustment balance,
Assets (net) if in debit, should be shown under
this head. Only net position of inter-
office accounts inland as well as
foreign, should be shown here. For
arriving at the net balance of inter-
office adjustment accounts all
connected inter-office accounts
should be aggregated and the net
balance, if in debit, only should be

(Conted. on next page)

27
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
shown, representing mostly items in
transit and unadjusted items.
Other II. Interest Accrued Interest accrued but not due on
Assets investments and, advance and
interest due but not collected on
investment, will be the main
components of this item. As banks
normally debit, the borrowers’
accounts with interest due on the
balance sheet date, usually there may
not be any account of interest due on
advances. Only such interest as can
be realised in the ordinary course
should be shown under this head.

III. Tax paid in advance/ The amount of tax deducted at source

on securities, advance tax paid etc.
tax deducted at source
to the extent that these items are not
set off against relative tax provision
should be shown against this item.
IV. Stationery and Stamps Only exceptional items of expenditure
on stationery like bulk purchase of
security paper, loose leaf or other
ledgers, etc. which are shown as
quasi-asset to be written-off over a
period of time, should be shown here.
The value should be on a realistic
basis and cost escalation should not
be taken into account, as these items
are for internal use.

V. Non-banking assets Immovable properties/tangible assets

acquired in satisfaction acquired in satisfaction of claims are
of claims to be shown under this head.

(Conted. on next page)

28
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
VI. Others This will include items like claims
which have not been met for
instance, clearing items, debit items
representing addition to assets or
reduction in liabilities, which have not
been adjustment for technical
reasons, want of particulars, etc.
advances given to staff by a bank as
an employer and not as a banker,
etc. Items which are in the nature of
expenses, which are pending
adjustments, should be provided for
and the provision netted against this
item, so that only realisable value is
shown under this head. Accrued
income other than interest may also
be included here.

Contin- 12 I. Claims against the bank

gent not acknowledged as
Liabi- debts
lities II. Liabilities for partly paid Liabilities on partly paid shares,
Investments debentures, etc. will be included in
this head.

[Link] on account of Outstanding forward exchange

outstanding forward contracts may be included here.
exchange contracts

(Conted. on next page)

29
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Contin- IV. Guarantees given on Guarantees given for constituents in
gent behalf of constituents India and outside India may be
Liabi- (i) in India shown separately.
lities (ii) outside India
V. Acceptances, endorse- This item will include letters of credit
ment and other and bills accepted by the bank on
obligations behalf of customers.
VI. Other items for which the Arrears of cumulative dividends, bills
Bank is contingently liable rediscounted under under-writing
contracts, estimated amounts of
Bill for contracts remaining to be executed
Collect- on Capital Account and riot provided
ion for, etc., are to be included here.
Bills and other items in the course
of collection and not adjusted will be
shown against this item in summary
version only, a separate schedule is
proposed.

Profit and Loss Account

Interest 13 I. Interest/discount on Includes interest and discount on all

earned advances bills types of loans and advances, cash
credit, demand loans, overdrafts,
export loans, term loans, domestic
and foreign bills purchased and
discounted (including those
rediscounted), over interest and also
interest subsidy, if any, relating to
advances/bills.
II. Income on Includes all income derived from the
investments investment portion folio by way of
interest and dividend.

(Conted. on next page)

30
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Interest III. Interest on balances with Includes interest on balances with
earned the Reserve Bank of India Reserve Bank and other banks, call
and other inter-bank loans, money market placements,
funds etc.
IV. Others Includes any other interest / discount
income not included in the above
heads.

Other 14 I. Commission, exchange Includes all remuneration on services

Income and Brokerage such as commission on collections,
commission/exchanges on
remittances and transfers,
commission on letters of credit,
letting out of lockers and guarantees,
commission on Government
business, commission on other
permitted agency business including
consultancy and other services,
brokerage, etc., on securities. It does
not include foreign exchange income.
II. Profit on sale of Includes profit/loss on sale of
investments, Less : Loss securities, furniture, land and
on sale of investments buildings, motor vehicle, gold, silver,
III. Profit on revaluation of etc. Only the net position should be
investments. Less : Loss shown. If the net position is a loss,
on revaluation of the amount should be shown as a
investments deduction. The net profit/loss on
IV. Profit on sale of land, revaluation of assets may also be
buildings and other assets. shown under this item.
Less: Loss on sale of land,
buildings and other assets

(Conted. on next page)

31
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Other V. Profit on exchange Includes profit/loss on dealing in
Income Transactions. foreign exchange, all income earned
Less : Loss on sale of by way of foreign exchange,
land, buildings and other commission and charges on foreign
assets. exchange transactions excluding
interest which will be shown under
interest. Only the net position should
be shown. If the net position is a
loss, it is to be shown as a deduction.
VI. Income earned by way of
dividends etc., from
subsidiaries, companies,
joint ventures abroad/in
India.
VII. Miscellaneous income Includes recoveries from constituents
for godown rents, income from
bank’s properties, security charges,
insurance, etc., and any other
miscellaneous income. In case, any
item under this head exceeds one
percentage of the total income,
particulars may be given in the notes.
Interest 15 I. Interest on deposits Includes interest paid on all types of
Expended deposits including deposits from
banks and other institutions.
II. Interest on Reserve Bank Includes discount/interest on all
of India / inter-bank borrowings and refinance from the
borrowings Reserve Bank of India and other
banks.

III. Others Includes discount / interest on all

borrowings / refinance from financial
institutions. All other payments like

(Conted. on next page)

32
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
interest on participation certificates,
penal interest paid, etc. may also be
included here.

Operating 16 I. Payments to and Includes staff salaries/wages,

Expenses provisions for employees allowances, bonus, and other staff
benefits, like provident fund, pension,
gratuity, live ness to staff, leave fare
concessions, staff welfare, medical
allowance to staff, etc.
II. Rent, taxes and lighting Includes rent paid by the banks on
buildings and other municipal and
other taxes paid (excluding income-
tax and interest tax) electricity and
other similar charges and levies,
House rent allowance and other
similar payments to staff should
appear under the head ‘Payments to
and Provisions for Employees’
III. Printing and Stationery Includes books and forms, and
stationery used by the bank and
other printing charges, which are not
incurred by way of publicity
expenditure.
IV. Advertisement and Includes expenditure incurred by the
Publicity bank for advertisement and publicity
purposes including printing charges
or publicity matter.
V. Depreciation on bank’s Includes depreciation on bank’s own
property property, motor cars and other
vehicles, furniture, electric fittings,
vaults, lifts, lease hold properties,
non-banking assets, etc.

(Conted. on next page)

33
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Operating VI. Director’s fees, Includes sitting fees and all other
Expenses allowances and items of expenditure incurred on
expenses behalf of the directors. The daily
allowance, hotel charges,
conveyance charges, etc. which
though in the nature of
reimbursement of expenses incurred,
may be included under this head.
Similar expenses of Local
Committee members may also be
included under this head.

VII. Auditor’s fees and Includes the fees paid to the statutory
expenses (including auditors and branch auditors for the
branch auditor’s fees professional services rendered and
and expenses) also all expenses for performing their
duties, even though they may be in
the nature of reimbursement of
expenses. If external auditors have
been appointed by the banks
themselves for internal inspections
and audits and other services. the
expenses incurred in that context
including fees may not be included
under this head but should be shown
under ‘other expenditure’

[Link] charges All legal expenses and

reimbursement of expenses incurred
in connection with legal services arc
to be included here.

IX. Postage, telegraphs, Includes all postal charges like

telephones, etc. stamps, telegrams, telephones, etc.

X. Repairs and maintenance Includes repairs to bank’s property,

their maintenance charges, etc.

(Conted. on next page)

34
 Item Schedule Coverage Notes and Instructions for compilation
(1) (2) (3) (4)
Operating XI. Insurance Includes insurance charges on
Expenses bank’s property, insurance premier
paid to Deposit Insurance and Credit
Guarantee Corporation, etc. to the
extent they are not recovered from
the concerned parties.
XII. Other expenditure All expenses other than those not
included in any of the other heads,
like, licence fees, donations,
dubscriptions to papers, periodicals,
entertainment expenses, travel
expenses, etc. may be included
under this head. In case, any
particular item under this head
exceeds one percentage of the total
income, the particulars may be given
inthc notes.
Provisions Includes all provisions made for bad
and and doubtful debts, provisions for
contin- taxation, provisions for diminution in
gencies the value of investments, transfers
to contingencies and other similar
items.
Disclosure of Accounting Policies
In order that the financial position of banks represent a true and fair view, the
Reserve Bank of has directed the banks to disclose accounting policies regarding
the key areas of operations along with the notes of account in their financial statements
for the accounting year ending 31-3-1991 and onwards, on a regular basis. The
accounting policies disclosed may contain the following aspects subject to reflection
by individual banks:
1. General :
The accompanying financial statements have been prepared on the
historical cost and conform to the statutory provisions and practices prevailing in the
country.
35
2. Transactions involving Foreign Exchange :
a) Monetary assets and liabilities have been translated at the exchange rates,
prevailing at the close of the year. Non-monetary assets have been carried in
the books at the historical cost.

b) Income and expenditure items in respect of Indian branches have been

translated at the exchange rates, ruling on the date of the transaction and in
respect of overseas branches at the exchange rates prevailing at the close
of the year.

c) Profit or loss on pending forward contracts have been accounted for.

3. Investments :
a) Investment in governments and other approved securities in India are valued
at the lower of cost or market value.

b) Investments in subsidiary companies and associate (i.e. companies in which

the bank holds at least 25 percent of the share capital) have been accounted
for on the historical cost basis.

c) All other investments are valued at the lower of cost or market value.

4. Advances :
a) Provisions for doubtful advances have been made to the satisfaction of the
auditors:

i) In respect of identified advances, based on a periodic review of

advances and after taking into account the portion of advance
guaranteed by the Deposit Insurance and Credit Guarantee
Corporation, the Export Credit and Guarantee Corporation and similar
statutory bodies;

ii) In respect of general advances, as a percentage of total advances taking

into account the guidelines issued by the Government of India and the
Reserve Bank of India.

b) Provisions in respect of doubtful advances have been deducted from the

advances to the extent necessary and the excess have been included under
“Other Liabilities and Provisions”.

c) Provision have been made on a gross basis. Tax relief, which will be

36
 available when the advance is written-off, will be accounted for in the year of
write-off.

5. Fixed Assets :

a) Premises and other fixed assets have been accounted for at their historical
cost. Premises which have been revalued are accounted for at the value
determined on the basis of such revaluation made by the professional values,
profit arising on revaluation has been credited to Capital Reserve.

b) Depreciation has been provided for on the straight line/diminishing balance

method.

c) In respect of revalued assets, depreciation is provided for on the revalued

figures and an amount equal to the additional depreciation consequent of
revaluation is transferred annually from the Capital Reserve to the General
Reserve / Profit and Loss Account.

6. Staff Benefits :

Provision for gratuity pension benefits to staff have been made on an accrual
casual basis. Separate funds for gratuity / pension have been created.

7. Net Profit :

a) the net profit disclosed in the Profit and Loss Account in after:

i) provisions for taxes on income, in accordance with the statutory

requirements,

ii) provisions for doubtful advances.

iii) adjustments to the value of “current investments” in government and other

approved securities in India, valued at lower of cost of market value,

iv) transfers to contingency funds.

v) other usual or necessary provisions.

b) Contingency funds have teen grouped in the Balance Sheet under the head
“Other Liabilities and Provisions”.

37
Some Special Transactions
Interest on Doubtful Debts
When a debt is found to be doubtful at the end of the accounting year, a question
may arise whether the interest on that should be credited to interest Account or not.
There is no doubt that interest has accrued; but It is equally clear that the realization
of this interest is doubtful. Therefore, as prudent accounting policy, such interest
should be transferred to Interest Suspense Account.

1.9 Illustrative Examples on Bank Final Accounts

Illustration - I
1. From the following balances extracted from the books of Tushar Bank Ltd.,
Akola, prepare the Profit and Loss Account for the year ended 31st March 2015 and
the Balance Sheet as on that date.
Particulars Rs.
Current accounts 1,60,00,000
Savings Accounts 60,00,000
Fixed and time deposits 19,00,000
Acceptances 4,00,000
Unclaimed dividend 60,000
Dividend 2013-2014 1,00,000
Profit and Loss A/c (Credit) on 1-4-2015 4,20,000
Reserve fund 7,00,000
Share Capital: 20,000 shares of Rs. 50 each. 10,00,000
Interest and discount received 15,00,000
Interest paid 4,00,000
Borrowings from other banks 14,00,000
Money at call 6,00,000
Investments (Market value Rs. 62,00,000) 60,00,000
Premises
(After depreciation upto 31-3-2014 Rs. 2,00,000) 24,00,000
Sundry creditors 60,000
Bills payable 16,00,000
Bills for collection 2,80,000

38
 Salaries 1,60,000
Rent and taxes 40,000
Audit fee 4,000
Printing 10,000
General expenses 6,000
Cash in hand 1,20,000
Cash with R.B.I. 30,00,000
Cash with other banks 26,00,000
Bills discounted and purchased 12,00,000
Loans, overdrafts and cash credits 1,40,00,000
Adjustments :
1) Authorised share capital is Rs. 20,00,000 divided into 40,000 shares of Rs.
50 each.
2) Rebate on bills discounted amounted to Rs. 10,000.
3) Create a provision for taxation Rs. 2,00,000.
4) Provision for bad and doubtful debts is required to be made at Rs. 60,000.
5) Provide 5% depreciation on the original amount of premises.
Tushar bank Ltd.
Profit and Loss Account
For the year ended 31st March 2015
Schedule Current Previous
Particulars
No. Year Year
I. Income
Interest earned 13 14,90,000
Other Income 14 Nil
Total 14,90,000
II. Expenditure
Interest expended 15 4,00,000
operating expenses 16 3,50,000
provision (tax) 2,00,000
other provisions 60,000
Total 10,10,000
(Conted. on next page)
39
III. Profit/ Loss
Profit brought forward 4,20,000
Net profit for the year 4,80,000
Total 9,00,000
IV. Appropriations
Transfer to Reserve fund 96,000
Dividend for last year 1,00,000
Balance C/d. 7,04,000
Total 9,00,000

Form ‘A’
Balance Sheet of Tushar Bank Ltd.
As on 31-3-2015
Schedule Current Previous
Particulars
No. Year Year
Capital and Liabilities
Capital 1 10,00,000
Reserve and surplus 2 15,00,000
Deposits 3 2,39,00,000
Borrowings 4 14,00,000
Other liabilities and provisions 5 19,30,000
Total 2,97,30,000
Assets
Cash in hand and with R.B.I. 6 31,20,000
Balance with other banks, money
at call and short notice 7 32,00,000
Investments 8 60,00,000
Advances 9 1,51,40,000
Fixed Assets 10 22,70,000
Other Assets 11 Nil
Total 2,97,30,000
Contingent Liabilities 12 4,00,000
Bills for collection -- 2,80,000

40
Working Details :
Schedule No. 1 : Capital
Particulars Current Year Previous Year

Authorised Capital
40,000 shares of Rs. 50 each 20,00,000

Issued Capital

20,000 shares of Rs. 50 each fully paid 10,00,000

Total 10,00,000

Schedule No. 2 : Reserve and Surplus

Particulars Current Year Previous Year

Reserve Fund 7,00,000

Add 20% addition 96,000 7,96,000

Balance of P & L Appropriation A/c. 7,04,000

Total 15,00,000

Schedule No. 3 : Deposits

As on 31-3-....... Previous
Particulars
(Current Year) Year

Current Accounts 1,60,00,000

Saving Account 60,00,000

Fixed and time deposits 19,00,000

Total 2,39,00,000

Schedule No. 4 : Borrowings

As on 31-3-....... Previous
Particulars
(Current Year) Year

Borrowing from other Banks 14,00,000

Total 14,00,000

41
 Schedule No. 5 : Other Liabilities and Provisions
Particulars Current Year Previous Year

Unclaimed dividend 60,000

Sundry Creditors 60,000

Bills payables 16,00,000

Rebate on bills discounted 10,000

Provision for taxation 2,00,000

Total 19,30,000

Schedule No. 6 : Cash in hand and with R.B.I.

Particulars Current Year Previous Year

Cash in hand 1,20,000

Cash with R.B.I. 30,00,000

Total 31,20,000

Schedule No. 7
Balance with other Banks, Money at call & Short Notice.

Particulars Current Year Previous Year

Money at call 6,00,000

Cash with other Banks 26,00,000

Total 32,00,000

Schedule No. 8 : Investments

Particulars Current Year Previous Year

Investments 60,00,000

(Market Value Rs. 6,20,000)

Total 60,00,000

42
 Schedule No. 9 : Advances
Particulars Current Year Previous Year
Loans overdrafts & cash credits 1,40,00,000
Less : provision 60,000 1,39,40,000
Bills discounted and purchased 12,00,000
Total 1,51,40,000

Schedule No. 10 : Fixed Assets

Premises 24,00,000
Less : Depreciation 1,30,000 22,70,000
(5% on original cost)
Total 22,70,000

Schedule No. 11 : Other Assets

Nil
Total NIL

Schedule No. 12 : Contingent Liabilities

Acceptances on behalf of customer 4,00,000
Total 4,00,000

Schedule No. 13 : Interest earned

Interest and Discount 15,00,000
Less Rebate on bill discount 10,000 14,90,000
Total 14,90,000

Schedule No. 14 : Other Incomes

Nil
Total Nil

Schedule No. 15 : Interest Expended

Interest Paid 4,00,000
Total 4,00,000

43
 Schedule No. 16 : Operating Expenses
Particulars Current Year Previous Year
Salaries 1,60,000
Rentals Taxes 40,000
Audit Fees 4,000
Printing 10,000
General Expenses 6,000
Depreciation on Premises 1,30,000

Total 3,50,000

Illustration-II
1. From the following balances of Mahindra Bank Ltd., as on 31st March 2015,
prepare Profit and Loss A/c for the year ended 31st march 2008 and Balance sheet
as on that date.
Particulars Rs.
Equity share capital of Rs. 100 each
Rs. 50 paid up (Authorised and Issued 40,000 shares) 20,00,000
Profit and Loss A/c (Cr. on 1-4-2014) 8,00,000
Current Deposit A/c 68,20,000
Fixed Deposit A/c 78,00,000
Saving Bank A/c 51,30,000
Director’s fees 90,000
Audit fees 20,000
Furniture (Cost Rs. 20,00,000) 17,40,000
Interest and discount received 42,00,000
Commission and exchange 20,00,000
Reserve fund 7,00,000
Printing and Stationery 80,000
Salary (including Manager’s Rs. 4,00,000) 14,00,000
Building (Cost Rs. 60,00,000) 45,00,000
Cash in hand 3,20,000

44
 Cash with RBI 70,00,000
Cash with Other Bank 65,00,000
Law charges 30,000
Investment at cost 24,00,000
Loans, cash credit and overdraft 60,00,000
Bills discounted and purchased 28,00,000
Interest paid 30,00,000
Borrowing from Laxmi Bank Ltd. 40,00,000
Branch Adjustment A/c(Cr.) 26,00,000
Rent and Taxes 1,70,000
Following additional information is available:
1) The Bank has accepted on behalf of the customers bills worth Rs. 30,00,000
against the securities or Rs. 38,00,000 lodged with the Bank.
2) Rebate on bills discounted to Rs. 1,10,000
3) Provide depreciation on building by 10% and on furniture by 5% on cost.
4) Provide Rs. 30,000 for bad and doubtful debts.
Mahindra Bank Ltd.
Profit and Loss Account
For the year ended 31st March 2015
Schedule Current Previous
Particulars
No. Year Year
Income
Interest earned 13 40,90,000
Other Income 14 20,00,000
Total 60,90,000
Expenditure
Interest expended 15 30,00,000
Operating expenses 16 24,90,000
Provisions 30,000
Other provisions
Total 55,20,000
(Conted. on next page)
45
Prof it /Loss
Profit brought forward 8,00,000
Net profit for the year 5,70,000
Total 13,70,000
Appropriations
Transfer to Reserve fund 1,14,000
Balance C/d. 12,56,000
Total 13,70,000

Form ‘A’
Balance Sheet of Mahindra Bank Ltd.
as on 31-3-2015
Schedule Current Previous
Particulars
No. Year Year

Capital and Liabilities

Capital 1 20,00,000
Reserve and surplus 2 20,70,000
Deposits 3 1,97,50,000
Borrowings 4 40,00,000
Other liabilities and provisions 5 27,10,000
Total 3,05,30,000
Assets
Cash in hand and with R.B.I. 6 73,20,000
Balance with other banks,
money at call and short notice 7 65,00,000
Investments 8 24,00,000
Advances 9 87,70,000
Fixed Assets 10 55,40,000
Other Assets 11 Nil
Total 3,05,30,000
Contingent Liabilities 12 30,00,000
Bills for collection --- ---

46
Working Details
Schedule No. 1 : Capital

Particulars Current Year Previous Year

Authorised Capital

40000 shares of Rs. 1 00 each 40,00,000

Issued and Paid up Capital

40000 shares of Rs. 1 00 each Rs. 50 paid 20,00,000

Total 20,00,000

Schedule No. 2 : Reserve and Surplus

Particulars Current Year Previous Year
Reserve Fund 7,00,000

Add 20% addition 1,14,000 8,14,000

Balance of P & L Appropriation A/c. 12,56,000

Total 20,70,000

Schedule No. 3 : Deposits

Particulars Current Year Previous Year

Current Deposits A/c 68,20,000

Fixed Deposit A/c 78,00,000

Saving Bank A/c 51,30,000

Total 1,97,50,000

Schedule No. 4 : Borrowings

Particulars Current Year Previous Year

Borrowing from Laxmi Bank Ltd. 40,00,000

Total 40,00,000

47
 Schedule No. 5 : Other Liabilities and Provisions
Particulars Current Year Previous Year
Branch Adjustment 26,00,000

Rebate on bills discounted 1,10,000

Total 27,10,000

Schedule No. 6 : Cash in hand and with R.B.I.

Particulars Current Year Previous Year
Cash in hand 3,20,000

Cash with R.B.I. 70,00,000

Total 73,20,000

Schedule No. 7
Balance with other Banks, Money at call & Short Notice.
Particulars Current Year Previous Year
Cash with other Banks 65,00,000

Total 65,00,000

Schedule No. 8 : Investments

Particulars Current Year Previous Year
Investments at Cost 24,00,000

Total 24,00,00

Schedule No. 9 : Advances

Particulars Current Year Previous Year
Loan Cash Credit and
overdrafts 60,00,000

Less : Provision 30,000 59,70,000

Bills discounted and purchased 28,00,000

Total 87,70,000

48
 Schedule No. 10 : Fixed Assets
Particulars Current Year Previous Year
Furniture at cost 20,00,000
Less : Depreciation upto date 3,60,000 16,40,000
Building at cost 60,00,000
Less Dep. upto date 21,00,000 39,00,000
Total 55,40,000

Schedule No. 11 : Other Assets

Particulars Current Year Previous Year
Nil
Total Nil

Schedule No. 12 : Contingent Liabilities

Particulars Current Year Previous Year
Acceptances on behalf of customers 30,00,000
Total 30,00,000

Schedule No. 13 : Interest earned

Particulars Current Year Previous Year
Interest and Discount Received 42,00,000
Less Rebate on bill discounted 1,10,000 40,90,000
Total 40,90,000

Schedule No. 14 : Other Incomes

Particulars Current Year Previous Year
Commission and Exchange 20,00,000
Total 20,00,000

Schedule No. 15 : Interest Expended

Particulars Current Year Previous Year

Interest Paid 30,00,000
Total 30,00,000

49
 Schedule No. 16 : Operating Expenses
Particulars Current Year Previous Year
Directors fees 90,000
Audit fees 20,000
Printing and Stationery 80,000
Managers Salary 4,00,000
Staff Salary 10,00,000
Law Charges 30,000
Rent and Taxes 1,70,000
Depreciation on Furniture 1,00,000
Depreciation on Building 6,00,000
Total 24,90,000

Illustration - III
The following is the Trial Balance of Lalu Bank Ltd.,
as on March 31st 2015
Particulars Rs. Particulars Rs.
Loans, cash credits Share Capital :
and Overdrafts 28,50,000 50,000 equity shares
Premises 5,00,000 of Rs. 100 each fully
Indian Government Securities 41,70,000 paid 50,00,000
Salaries 2,80,000 Reserve Fund 25,00,000
General Expenses 2,74,000 Current Deposit 10,00,000
Rent, Rates and Taxes 23,000 Fixed Deposit 12,50,000
Director’s Fees 18,000 Savings Bank Deposit 5,00,000
Stock of Stationery 85,000 Profit & Loss A/c
Bill Purchased and Discounted 4,60,000 (1-4-2014) 1,60,000
Shares 5,00,000 Interest and Discount 12,80,000
Cash in hand and with Recurring Deposits 2,00,000
Reserve Bank 19,30,000
Money at call and short notice 8,00,000
1,18,90,000 1,18,90,000

50
 The following information should be considered :
a) Provision for bad and doubtful debts is required, amounting to Rs. 50,000
b) Interest accrued on investments was Rs. 80,000
c) Unexpired discount amounts of Rs. 3,800
d) Endorsement made on behalf of customers totalled Rs. 11,50,000
e) Authorised capital was 80,000 equity shares of Rs. 100 each,
f) Rs. 1,00,000 were added to the premises during the year.
Depreciation at 5% on the opening balance is required,
g) Market Value of Indian Government Securities was Rs. 39,00,000
Prepare Profit and Loss Account for the year ended 31st March 2015 and
Balance Sheet as on that date in the prescribed form.
Lalu Bank Ltd.
Profit and Loss Account
For the year ended 31st March 2015
Schedule Current Previous
Particulars
No. Year Year
I. Income
Interest earned 13 13,56,200
Other Income 14 Nil
Total 13,56,200
Expenditure
Interest expended 15 Nil
Operating expenses 16 6,15,000
Provisions 50,000
Other provisions --
Total 6,65,000
Profit and Loss
Profit brought forward 1,60,000
Net profit for the year 6,91,200
Total 8,51,200
Appropriations
Transfer to Reserve fund 1,38,240
Balance C/d. 7,12,960
Total 8,51,200

51
 Form ‘A’
Balance Sheet of Lalu Bank Ltd.
For the year ended on 31st March, 2015
Schedule Current Previous
Particulars
No. Year Year

Capital and Liabilities

Capital 1 50,00,000
Reserve and surplus 2 33,51,200
Deposits 3 29,50,000
Borrowings 4 Nil
Other liabilities and provisions 5 3,800
Total 1,13,05,000
Assets
Cash in hand and with R.B.I. 6 19,30,000
Balance with other banks, money
at call and short notice 7 8,00,000
Investments 8 46,70,000
Advances 9 32,60,000
Fixed Assets 10 4,80,000
Other Assets 11 1,65,000
Total 1,13,05,000
Contingent Liabilities 12 11,50,000
Bills for collection --- ---

Working Details
Schedule No. 1 : Capital
Particulars Current Year Previous Year
Authorised Capital
80000 shares of Rs. 100 each 80,00,000
Issued and Paid up Capital
50000 shares of Rs. 1 00 each Fully paid 50,00,000

Total 50,00,000

52
 Schedule No. 2 : Reserve and Surplus
Particulars Current Year Previous Year
Reserve Fund 25,00,000
Add 20% addition 1,38,240 26,38,240
Balance of P & L Appropriation A/c. 7,12,960
Total 33,51,200

Schedule No. 3 : Deposits

Particulars Current Year Previous Year
Current Deposits A/c 10,00,000
Fixed Deposit A/c 12,50,000
Saving Bank A/c 5,00,000
Recurring Deposits 2,00,000
Total 29,50,000

Schedule No. 4 : Borrowings

Nil
Total Nil

Schedule No. 5 : Other Liabilities and Provisions

Particulars Current Year Previous Year
Unexpired Discount 3,800
Total 3,800

Schedule No. 6 : Cash in hand and with R.B.I.

Particulars Current Year Previous Year
Cash in hand and with R.B.I. 19,30,000
Total 19,30,000

Schedule No. 7
Balance with other Banks. Money at call & Short Notice.
Particulars Current Year Previous Year
Money at call and short notice 8,00,000
Total 8,00,000

53
 Schedule No. 8 : Investments
Particulars Current Year Previous Year
Indian Government securities
(Market value 39, 00, 000) 41,70,000
Shares 5,00,000
Total 46,70,000

Schedule No. 9 : Advances

Loan Cash Credit and overdrafts 28,50,000
Less : Provision 50,000 28,00,000
Bills discounted and purchased 4,60,000
Total 32,60,000

Schedule No. 10 : Fixed Assets

Premises Opening bal. 4,00,000
Add : Addition during year 1,00,000
5,00,000
Less : [Link] Op. baol. 5% 20,000 4,80,000
Total 4,80,000

Schedule No. 11 : Other Assets

Stock of Stationery 85,000
Interest accrued on Investment 80,000
Total 1,65,000

Schedule No. 12 : Contingent Liabilities

Endorsement on behalf of customers 11,50,000
Total 11,50,000

Schedule No. 13 : Interest earned

Interest and Discount 12,80,000
Less : Unexpired Discount 3,800 12,76,200
Interest on Investment 80,000
Total 13,56,200

54
 Schedule No. 14 : Other Incomes
Particulars Current Year Previous Year

Nil

Total Nil

Schedule No. 15 : Interest Expended

Particulars Current Year Previous Year

Nil

Total Nil

Schedule No. 16 : Operating Expenses

Particulars Current Year Previous Year

Depreciation on Premises 20,000

Salaries 2,80,000
General Expenses 2,74,000
Rent. Rate and Taxes 23,000
Director Fees 18,000

Total 6,15,000

Illustration - IV
From the following balances extracted from the books of Karodpati Bank Ltd,
Solapur prepare the Profit & Loss Account for the year ended 31st March, 2015 and
the Balance Sheet as on that date.
Particulars Rs.
Salaries and allowances (including remuneration to
General Manager Rs. 9,00,000 and Director’s Fees
Rs. 1,00,000) 25,00,000
Sundry expenses 1,50,000
Interest paid on deposits 21,25,000
Commission, exchange (credit) 17,00,000
Interest and discount received 48,00,000
Statutory Reserved fund 20,00,000

55
 Deposits : a) Fixed 87,50,000
b) Savings 60,00,000
c) Current 90,00,000
Loans, cash-credits and over drafts 2,30,00,000
Bills discounted and purchased 15,00,000
Investment fluctuation fund 5,00,000
Cash in hand 17,50,000
Cash with RBI 25,00,000
Cash with Vijay Bank Ltd. 2,50,000
4% Government securities 60,00,000
Silver 5,00,000
Gold 21,00,000
Bills for collection 10,00,000
Interest accrued on investments 3,00,000
Acceptances, endorsements and other obligations 20,00,000
Profit and Loss account (credit balance on 1-4-2007) 30,00,000
Shares in Telco Co. Ltd. 10,00,000
Interim divided paid 3,00,000
Drafts payable 8,00,000
Share capital (authorised and issued)
2,00,000 shares or Rs. 100 each Rs. 50 paid 10,00,000
Rent and taxes paid 2,00,000
Premises 25,00,000
Furniture and fixtures 7,50,000
Provident fund 8,00,000
Rebate on bills discounted 75,000
Unclaimed dividend 1,00,000

Adjustments :
1. Provide Rs. 4,00,000 for taxation and Rs. 2,50,000 for bad and doubtful
debts.

56
 2. Rebate on bills discounted is over calculated by Rs. 25,000
3. An interim dividend declared was at 4% actual.
4. The market value of 4% Govt. securities on 31-3-2008 was Rs. 58,25,000
and was to be shown at this figure in the B/S.
5. Current Accounts include Rs. 4,00,000 debits balance being overdraft.

Solution :
Karodpati bank Ltd.
Profit and Loss Account
For the year ended 31st March 2008
Schedule Current Previous
Particulars
No. Year Year
Income
Interest earned 13 48,25,000
Other Income 14 17,00,000
Total 65,25,000
Expenditure
Interest expended 15 21,25,000
Operating expenses 16 28,50,000
Provisions 2,50,000
Other provisions 4,00,000
Total 56,25,000
Profit /Loss
Profit brought forward 30,00,000
Net profit for the year 9,00,000
Total 39,00,000
Appropriations
Transfer to Reserve fund 1,80,000
Interim Dividend 3,00,000
Add : outstanding 1,00,000 4,00,000
Balance C/d. 33,20,000

Total 39,00,000

57
 Form ‘A’
Balance Sheet of Lalu Bank Ltd.
as on 31-3-2015
Schedule Current Previous
Particulars
No. Year Year
Capital and Liabilities
Capital 1 100,00,000
Reserve and surplus 2 58,25,000
Deposits 3 2,41,50,000
Borrowings 4 Nil
Other liabilities and provisions 5 21,50,000
Total 4,21,25,000
Assets
Cash in hand and with R.B.I. 6 42,500,000
Balance with other banks,
Money at call and short notice 7 2,50,000
Investments 8 89,25,000
Advances 9 2,46,50,000
Fixed Assets 10 32,50,000
Other Assets 11 8,00,000
Total 4,21,25,000
Contingent Liabilities 12 20,00,000
Bills for collection -- 10,00,000

Working Details
Schedule No. 1 : Capital
Particulars Current Year Previous Year
Authorised Capital
2,00,000sharesof Rs. 100each 2,00,00,000
Issued and Paid up Capital
200000 shares of Rs. 1 00 each Rs. 50 paid 1,00,00,000

Total 1,00,00,000

58
 Schedule No. 2 : Reserve and Surplus
Particulars Current Year Previous Year
Statutory Reserve Fund 20,00,000
Add : 20% transfer 1,80,000 21,80,000
Investment flaction fund 5,00,000
Less : loss on revaluation
of Investment? 1,75,000 3,25,000
Balance of P&L Appropriation A/c 33,20,000

Total 58,25,000

Schedule No. 3 : Deposits

Particulars Current Year Previous Year
Fixed Deposits 87,50,000
Saving Deposits 60,00,000
Current Deposits 90,00,000
Add overdrawn 4,00,000 94,00,000

Total 2,41,50,000

Schedule No. 4 : Borrowings

Nil
Total Nil

Schedule No. 5 : Other Liabilities and Provisions

Particulars Current Year Previous Year
Drafts Payable 8,00,000
Provident Fund 8,00,000
Rebate on bills discounted 75,000
Less over calculated 25,000 50,000
Provision for tax 4,00,000
Unclaimed Dividend 1,00,000

Total 21,50,000

59
 Schedule No. 6 : Cash in hand and with R.B.I.
Particulars Current Year Previous Year
Cash in hand 17,50,000
Cash with R.B.I. 25,00,000
Total 42,50,000

Schedule No. 7
Balance with other Banks, Money at call & Short Notice.
Particulars Current Year Previous Year
Cash with millions Bank 2,50,000
Total 2,50,000

Schedule No. 8 : Investments

Particulars Current Year Previous Year
4% Govt. securities 60,00,000
Less loss on revaluation 1,75,000 58,25,000
Gold 21,00,000
Shares in Ltd. Co. 10,00,000
Total 89,25,000

Schedule No. 9 : Advances

Loan Cash Credit and overdrafts 2,30,00,000
Less Provision 2,50,000
2,27,50,000
Add overdrawn Current A/c. 4,00,000 2,31,50,000
Bills purchased and discounted 15,00,000
Total 2,46,50,000

Schedule No. 10 : Fixed Assets

Premises 25,00,000
Furniture and fixtures 7,50,000
Total 32,50,000

60
 Schedule No. 11 : Other Assets
Particulars Current Year Previous Year
Silver 5,00,000

Interest accrued on Investment 3,00,000

Total 8,00,000

Schedule No. 12 : Contingent Liabilities

Acceptance, endorsement and

other obligations 20,00,000

Total 20,00,000

Schedule No. 13 : Interest earned

Interest and discount received 48,00,000

Add over calculated rebate 25,000 48,25,000

Total 48,25,000

Schedule No. 14 : Other Incomes

Commission Exchange 17,00,000

Total 17,00,000

Schedule No. 15 : Interest Expended

Interest paid on deposits 21,25,000

Total 21,25,000

Schedule No. 16 : Operating Expenses

General managers remuneration 9,00,000

Directors fees 1,00,000
Staff salaries and allowances 15,00,000
Sundry Expenses 1,50,000
Rent and taxes paid 2,00,000

Total 28,50,000

61
Illustration – 5
The following are the figure extracted from the books of Ichalkaranji Bank Limited,
as on 31-3-2015 :

Particulars Rs.
Interest and Discount Received 37,05,738
Interest paid on Deposits 20,37,452
Issued and Subscribed Capital 10,00,000
Salaries and Allowances 2,00,000
Director’s fee and allowances 30,000
Rent and taxes paid 90,000
Postage and telegrams 60,286
Statutory reserve fund 8,00,000
Commission, exchange & brokerage 1,90,000
Rent received 65,000
Profit on sale of investments 2,00,000
Depreciation on Bank’s properties 30,000
Stationery expenses 40,000
Other expenses 25,000
Auditor’s Fee 5,000

Other Information:

a) A customer to whom a sum of Rs. 10 lakhs had been advanced has become
insolvent and it is expected that only 50% can be recovered from his estate.

b) Also there were other debts, for which a provision of Rs. 1,50,000 was
found necessary by the auditors.

c) Rebate on bills discounted on 31-3-2014 was Rs. 12,000 and or 31-3-2015

was Rs. 16,000.

d) Provide Rs. 6,50,000 for Income tax.

e) The directors desire to declare 10% dividends.

Prepare the Profit and Loss Account of Ichalkaranji Bank Ltd. for the year ended
on 31-3-2015.
62
Solution - 5
Ichalkaranji Bank Ltd.
Profit and Loss Account
For the year ended 31st March 2015
Schedule Current Previous
Particulars
No. Year Year
I. Income
Interest earned 13 37,01,738
Other Income 14 4,55,000
Total 41,56,738
II. Expenditure
Interest expended 15 20,37,452
Operating Expenses 16 4,80,286
Provisions (Bad & doubtful) 6,50,000
Other Provisions (Tax) 6,50,000
Total 38,17,738
III. Profit / Loss
Profit brought forward ---
Net profit for the year 3,39,000
Total 3,39,000
IV. Appropriations
Transfer to Reserve Fund 67,800
Proposed Dividend (10%) 1,00,000
Balance C/d. 1,71,200
Total 3,39,000
Schedule No. 13 : Interest Earned
Interest and discount received 37,05,738
Add : Opening balance of rebate 12,000
on bills discounted
37,17,738
Less : Closing balance of rebate
on bills discounted 16,000 37,01,738
Total 37,01,738

63
 Schedule No. 14 : Other Incomes
Commission exchange and brokerage 1,90,000
Rent received 65,000
Profit on sale of investment 2,00,000

Total 4,55,000

Schedule No. 15 : Interest Expended

Interest on deposits 20,37,452

Total 20,37,452

Schedule No. 16 : Opening Expenses

Salaries and allowances 2,00,000

Directors fees and allowances 30,000
Rent and taxes paid 90,000
Postage and telegrams 60,286
Depreciation on bank property 30,000
Stationery expenses 40,000
Auditors fees 5,000
Other expenses 25,000

Total 4,80,286

Illustration – 6
Friends Bank Ltd. gives you the following particulars from their books for the
year ended 31-3-2015. You are required to prepare Balance Sheet as on 31-3-2015
in the prescribed form.

Particulars Debit Rs. Credit Rs.

Cash in hand 1,50,000

Share Capital 25,00,000

Investments in Equity Shares 5,00,000

(Fully paid Rs. 3 lakhs Partly paid Rs. 2 lakhs)

General Reserve 3,00,000

64
 Statutory Reserve 6,00,000
Investments in Government Securities 5,75,000
(Central & State Government)
Interest accrued on Investments 15,000
Balances with Reserve Bank of India 2,00,000
Balance with Other Banks - (Current Accounts) 1,50,000
Borrowings from Central Bank of India
(unsecured) 4,00,000
Bills Payable 2,00,000
Fixed Deposits 25,00,000
Current Accounts 40,00,000
Contingency Accounts 4,00,000
Loans 50,00,000
Cash Credits 80,00,000
Overdrafts 7,70,000
Savings Accounts 65,00,000
Unclaimed Dividends 25,000
Bills Discounted & Purchased 15,00,000
Branch Adjustments 74,000
Profit & Loss A/c (1-4-2014) 1,00,000
Advances 7,50,000
Premises (less depreciation) 6,00,00
Furniture (less depreciation) 2,00,000
Provision for taxation 3,91,000
Profit for 2015 4,20,000

1,84,10,000 1,84,10,000

Following further information is given.

a) Authorised Capital is Rs. 1,00,00,000 (2,00,000 Shares of Rs. 50 each.)

b) Issued Capital is half of the Authorised Capital. All Shares are fully subscribed
on which Rs. 25 per share are paid up.

65
 c) Constituents ‘Liabilities for Acceptances and Endorsements Rs. 22,00,000.
d) Bills for collection Rs. 15,00,000.
e) Contingent liability for partly paid shares Rs. 2,00,000.
f) Provide for doubtful loans Rs. 20,000.
g) Market value of Investment on 31-3-2008 were
i) Shares in companies Rs. 5,25,000
ii) Government securities Rs. 6,00,000

Solution - 6
Form ‘A’
Balance Sheet of Friends Bank Ltd.
as on 31-3-2015
Schedule Current Previous
Particulars
No. Year Year
Capital and Liabilities
Capital 1 25,00,000
Reserve and surplus 2 14,00,000
Deposits 3 13,400,000
Borrowings 4 4,00,000
Other Liabilities and provisions 5 6,90,000
Total 1,83,90,000
Assets
Cash in hand and with R.B.I. 6 3,50,000
Balance with other banks,
money at call and short notice 7 1,50,000
Investments 8 10,75,000
Advances 9 1,60,00,000
Fixed Assets 10 8,00,000
Other Assets 11 15,000
Total 1,83,90,000
Contingent Liabilities 12 24,00,000
Bills for collection -- 15,00,000

66
Working Details
Schedule No. 1 - Capital
Authorised Capital
200000 shares of Rs. 50 each 1,00,00,000
Issued and paid up Capital
1,00,000 shares of Rs. 50 each Rs. 25 per 25,00,000
share paid up
Total 25,00,000

Schedule No. 2 - Reserve and Surplus

General Reserve 3,00,000
Statutory Reserve 6,00,000
Add - 20% of current profit 84,000 6,84,000
Balance of profit & loss appropriation A/c. 4,16,000
Total 14,00,000
Schedule No. 3 - Deposits
Fixed deposits 25,00,000
Current Accounts 40,00,000
Contingency Accounts 4,00,000
Saving Accounts 65,00,000
Total 1,34,00,000
Schedule No. 4 - Borrowings
Borrowing from Central Bank of India 4,00,000
Total 4,00,000

Schedule No. 5 - Other Liabilities and Provisions

Bills payables 2,00,000
Unclaimed dividend 25,000
Branch adjustments 74,000
Provision for taxation 3,91,000
Total 6,90,000

67
 Schedule No. 6 : Cash in hand and with R.B.I.
Particulars Current Year Previous Year
Cash in hand 1,50,000
Balance with Reserve Bank of India 2,00,000
Total 3,50,000

Schedule No. 7
Balance with other Banks, money at call and short notice.
Particulars Current Year Previous Year
Balance with other Bank 1,50,000
Total 1,50,000

Schedule No. 8 : Investments

Particulars Current Year Previous Year
Investment in shares (M.V. Rs. 5,25,000) 5,00,000
Investment in Government securities 5,75,000
(Market value Rs. 6,00,000)
Total 10,75,000

Schedule No. 9 : Advances

Loans 50,00,000
Less : Provision 20,000 49,80,000
Cash Credits 80,00,000
Overdrafts 7,70,000
Bills discounted and purchased 15,00,000
Advances 7,50,000
Total 1,60,00,000

Schedule No. 10 - Fixed Assets

Premises less depreciation 6,00,000
Furniture less depreciation 2,00,000
Total 8,00,000

68
 Schedule No. 11 - Other Assets
Particulars Current Year Previous Year

Interest accrued on investment 15,000

Total 15,000

Schedule No. 12 - Contingent Liabilities

Contingent liabilities for Acceptances 22,00,000

Liability for partly paid shares 2,00,000

Total 24,00,000

P & L Opening Balance : 1,00,000

Add : Current year profit : 4,20,000
5,20,000
Less : Bad debt provisions : 20,000
5,00,000
Less : Transfer to statutory reserve : 84,000
4,16,000

1.10 Important Adjustments/items and their effects in Bank Final Accounts:

1) Depreciation on bank property :
If it is asked to charge on original cost but written down value of asset is given
then add amount of depreciation to the W.D.V. for getting original cost of asset.
a) Show the asset at its original cost in schedule No. 10 and deduct the total
amount of depreciation from original cost.
b) Show the amount of depreciation of current year in operating expenses
schedule No. 16
2) Rebate on bills discounted / unexpired discount :
If it is given in trial balance - show in Schedule No. 5 if it is given for adjustment:-
a) Deduct the amount of rebate from Interest and discount in Schedule No. 13
b) Show the amount of rebate in other liabilities and provisions in Schedule
No. 5
69
 If it is overvalued then deduct from rebate amount and add in interest and discount
in Schedule No. 13
If it is under - valued then add the amount in rebate and deduct from the interest
and discount in Schedule-13
3) Provision for bad and doubtful debts :
Deduct the amount of provision from loans, cash credit and overdrafts in
Schedule No. 9 and put the amount of provision in P & LA/c under the head provision
4) Provision for taxation :
Show the amount of provision for tax in profit & loss account (Form ‘B’) under
provision or other provisions and show the same amount of Provision in Schedule
No. 5 (other Liab. and Provisions)
5) Statutory Reserve :
To transfer to statutory reserve is a statutory provision and hence not clearly
stated in adjustments: Therefore every year transfer 20% of current years profit to
statutory reserve.
Firstly add in statutory reserve in Schedule No. 2 and then show in appropriations
(P & L A/c)
6) Acceptances, Endorsements on behalf of Customers :
It is a contingent liability and not actual liability hence it is shown only in Schedule
No. 12 as it has no effect on tally of Balance Sheet.
7) Bills for Collection :
These are bill send by customers to bank for collection. These are not asset or
liabilities of bank. Bank is just acting as an agent in this regard. It is shown outside
the Balance Sheet just below the contingent liability.
8) Gold/Silver :
Gold is shown in Schedule NO. 8 (Investment) while silver is shown in Schedule
No. 11 (Other Assets)
9) Accrued Interest on investment-
If it is given in trial balance, show it in Schedule No. 11 (Other Assets)
If it is given for adjustment then show in Schedule No. 13 and Schedule No. 11

70
1.11 Key Words :

1) Non banking assets :

The assets which are not required for banking operation are called as non banking
assets. These are acquired by bank against security of loans advanced.

2) Money at call and short notice :

Such loans are advanced by banks from surplus cash to the needy banks loans
repayable within 24 hours are termed as ‘Money at Call’. Loans repayable by a notice
of seven days are termed as ‘Money at Short Notice’.

3) Bad debts :

Such part of advances, which is irrecoverable from clients.

4) Rebate on bills discounted :

This is a amount of discount received in advance. Bank discounts the bill, gets
discount on it, but some amount received on discounting of bill may relate to next
year. Such amount of discount related to next year but received in current year is
treated as rebate on bills discounted.

5) Contingent Liabilities :

This is a liability, which is not actual liability but may occur in future.

6) Letter of Credit :

It is a letter addressed by a banker certifying that a person named therein is

entitled to draw on him a credit up to certain limit. Unpaid balance of this letter on the
Balance Sheet date form s liability of the issuing bank.

7) Unclaimed Dividends :

It is a amount of dividend which is declared by bank but not collected by share

holders it forms part of liability of a bank.

71
1.12 Self Study Questions :
Exercise – 1

The following Trial Balance has been extracted from the books of Commercial
Bank Ltd. as on 31st March, 2015.

Particulars Debit Rs. Credit Rs.

Cash with RBI 5,00,000

Cash in Hand 3,70,000
Current and Contingency A/c 26,00,000
(before setting off overdraft of Rs. 1,00,000)
Savings Bank Account 40,00,000
Fixed Deposit Account 15,00,000
Bills Purchased and Discounted 20,00,000
Loans, Cash Credits including overdrafts 91,00,000
Rebate on Bills Discounted 1,50,000
Bills Payable 2,50,000
Investments in Securities 16,00,000
Reserve Fund 12,00,000
Non-Banking Assets acquired 1,00,000
Gold 2,00,000
Furniture 1,25,000
Premises 3,75,000
Profit and Loss A/c. 1,40,000
Interest Accrued 40,000
Outstanding Liabilities 60,000
Borrowings from Banks 2,00,000
Margin Money held against letter of credit issued 70,000
Issued and fully paid up Equity Share Capital 42,40,000

1,44,10,000 1,44,10,000

72
 With the help of the above trial balance, prepare the Balance Sheet as on 31st
March 2015, Provide Rs. 5,50,000 for Doubtful Debts.
Bills for Collection outstanding on 31-3-2015 Rs. 2,25,000
Authorised Capital consists of 8,48,000 Equity Shares of Rs. 10 each.
Acceptances, Endorsements and other obligations Rs. 3,00,000. Contingent liability
for public issue of shares underwritten Rs. 4,00,000.
Exercise – 2
From the following balances which are extracted from the books of Hindustan
Bank, prepare the Profit and Loss Account for the year ending 31 March 2015 and a
Balance Sheet as on that date.

Particulars Rs.

Share Capital : 2,000 Shares of Rs. 500 each

Rs. 200 per Share paid up 4,00,000
Bad debts written off 25,742
Reserve fund investments 2,00,000
General expenses 36,484
Current Accounts 40,48,844
Interest paid on Deposits 32,104
Deposit Accounts 13,84,046
Profit and Loss A/c (Cr.) 45,868
Particulars Rs.
Acceptance for customers 3,08,564
Discount 48,752
Endorsements and Guarantee 14,804
Commission, Exchange and Brokerage 8,848
Cash 45,308
Interest received 1,06,452
Cash with Reserve Bank 4,02,420
(Conted. on next page)

73
 Endorsements and Guarantee as per Contra 14,804
Owing by Foreign correspondent 40,088
Customers Liabilities for Acceptances 3,08,564
Borrowings from other Banks 12,96,412
Loans and Advances to customers 30,91,340
Investments 19,76,508
Bills discounted 12,45,648
Premises 4,43,580
Statutory Reserve 2,00,000

The following information is relevant:

a) Reserve Rs. 6,438 as Rebate on bills discounted.
b) Provide Rs. 15,000 for taxation reserve.
Exercise - 3
Following balances were extracted from the books of Sadhana Bank Ltd. as on
31st March 2015.
Particulars Rs.

Share Capital 6,00,000

Share Premium 1,80,000
Buildings 1,30,000
Deposits with RBI 1,50,000
Cash in Hand 22,700
Cash with other Banks 50,000
Investment in Government Securities 3,88,000
Other Investments 3,12,000
Gold Bullion 30,260
Bills for collection 87,000
Interest accrued on Investment 49,240
(Conted. on next page)

74
Loss on sale of Investment 60,000
Employees Security Deposits 30,000
Savings Deposits 14,840
Current Deposits 1,94,000
Fixed Deposits 46,100
Profit on Bullion 2,400
Acceptance and Endorsements 1,13,000
Miscellaneous Income 5,400
Non-Banking Assets 4,000
Statutory Reserve 2,80,000
Furniture 10,000

Postage and Telegram 100

Managing Directgr’s Remuneration 24,000
Borrowings from other Banks 1,54,460
Money at Call and Short Notice 52,000
Director’s Fees 2,400
Interest (Dr) 15,900
Advances 4,00,000
Loss on Sale of Furniture 2,000
Bills discounted and Purchased 25,000
Interest (Credit) 1,44,000
Discount (Credit) 84,000
Audit Fees 10,000
Salaries 42,400
Commission and Brokerage 50,600
Rent (Cr.) 1,200
Profit and Loss A/c. (Cr.) 13,000

75
Prepare Profit and Loss Account and Balance Sheet after considering
the following :
1. Provide for Taxation Rs. 20,000.

2. Claim by employees for Bonus Rs. 30,000 is to be provided.

3. As security of current deposits reveals that there are three accounts

overdrawn to the extent of Rs. 50,000 and total of credit balance is Rs.
2,44,000

4. Allow 5% depreciation on buildings.

5. Provision for bad and doubtful debts is required amounting to Rs. 20,000.

Exercise – 4
From the following you are required to prepare the Profit and Loss Account and
the Balance Sheet of the Shivaji Bank Limited as on 31 st March 2015 in prescribed
form :

Particulars Debit Rs. Credit Rs.

Issued Capital 20,000 shares of Rs. 100 each 20,00,000

Money at call and short notice 8,00,000

Reserve Fund 7,00,000

Cash in hand and with RBI 6,50,000

Deposits

a) Saving 10,00,000

b) Current 5,00,000

c) Fixed 10,00,000

Cash with other Banks 9,50,000

Borrowing from SBI 5,00,000

Investment in Government Securities 9,00,000

Secured Loans 15,00,000

76
 Cash Credits 5,00,000

Premises less depreciation 5,80,000

Furniture less depreciation 1,20,000

Rent 5,000 60,000

Interest and discount 8,00,000

Interest paid on deposits 3,00,000

Commission and brokerage 70,000

Salaries to the staff 1,50,000

Interest paid on borrowings 50,000

Audit Fees 10,000

Directors Fees 8,000

Bill discounted 80,000

Depreciation on Bank’s property 13,000

Printing and Stationery 8,000

Postage 6,000

66,30,000 66,30,000

Adjustments:

a) Provide Rs. 20,000 for doubtful debts.

b) Acceptances and endorsements on behalf of customers amounting to Rs.

4, 00, 000.

c) Provide Rs. 60,000 for taxation reserve.

d) Provide Rs. 1 0,000 on bill discounted but not matured on 31 March 2015

Exercise - 5

From the following balances extracted from the books of Laxmi Vishnu Bank
Ltd., Solapur prepare the Profit and Loss Account for the year ended 31 st March
2015 and the Balance Sheet as on that date.

77
 Particulars Rs.
Share Capital (Authorised and Issued)
10,000 shares of Rs. 50 each, Rs. 30 paid 3,00,000
Reserve Fund 1,00,000
Money at call and Short Notice 1,25,000
Investment at cost 10,00,000
Interest paid on Deposits and Borrowings 70,000
Law Charges 3,000
Postage and telegrams 2,000
Salaries (including remuneration to Managing Director
Rs. 10,000 and Directors Fees Rs. 6,000) 45,000
Rent, Taxes and Insurance 4,000
General Expenses (Including Statinery Rs. 3,000
auditor’s fees Rs. 5,000 and other expenditure Rs. 2,000) 10,000
Deposits : a) Fixed 5,00,000
b) Saving 2,00,000
b) Current 23,00,000
Premises (after Depreciation upto 31-3-2014 Rs. 25,000) 1,75,000
Furniture (after Depreciation upto 31-3-2014 Rs. 5,000) 15,000
Cash in Hand 35,000
Cash with RBI 2,00,000
Cash with other Banks 3,00,000
Borrowings from other Banks 3,50,000
Interest and Discount 2,23,250
Profit and Loss Account (Credit balance on 1-4-2014) 50,000
Dividend for the year 2013-2014 30,000
Loans, Cash Credit and Overdrafts 16,14,250
Bills Payable 25,000
Bills discounted and Purchased 3,50,000

78
 Unclaimed Dividend 5,000
Branch Adjustment (Cr.) 12,500
Commission and Exchange 22,500
Library Books 6,000
Repairs to Bank Property 4,000
Non-Banking Assets 25,000
Gold Bullion 75,000

Adjustments :
1. Provide depreciation at 5% on Premises and at 10% on Furniture. (On
original cost of the assets in question)

2. Provide Rs. 20,000 for Bad and Doubtful Debts.

3. Provide Rs. 25,000 for Taxation.

4. Rebate on Bills Discounted for unexpired period amounted to Rs. 750

5. The Bank has accepted on behalf of customers bills worth Rs, 1,00,000
and has Bills for collection being bills receivables, worth Rs. 50,000.

Exercise – 6
From the following balances extracted from the books of Dhanlaxmi Bank Ltd.,
Solapur prepare the Profit and Loss Account for the year ended 31 st March 2015
and the Balance Sheet as on that date.

Particulars Rs.

Share Capital (Authorised and Issued)

20,000 shares of Rs. 50 each, Rs. 30 paid 6,00,000

Reserve Fund 2,00,000

Money at call and Short Notice 3,00,000

Investment at cost 20,00,000

Interest paid on Deposits and Borrowings 1,40,000

Law Charges 6,000

79
Postage and telegrams 4,000
Salaries (including remuneration to Managing Director
Rs. 20,000 and Directors Fees Rs. 12,000) 90,000
Rent, Taxes and Insurance 8,000
General Expenses (Including Statinery Rs. 6,000
auditor’s fees Rs. 10,000 and other expenditure Rs. 4,000) 20,000
Deposits : a) Fixed 10,00,000
b) Saving 4,00,000
c) Current 46,00,000
Premises (after Depreciation up 3*1-3-2014 Rs. 50,000) 3,50,000
Furniture (after Depreciation upto 31-3-2014 Rs. 10,000) 30,000
Cash in Hand 70,000
Cash with RBI 4,00,000
Cash with SBI 6,00,000
Borrowings from Bank of India 7,50,000
Interest and Discount 4,46,500
.Profit and Loss Account (Credit Balance on 1-4-2014) 1,00,000
Dividend paid for the year 2013-14 60,000
Loans, Cash-Credits and Overdrafts 32,28,500
Bills Payable 50,000
Bills Discounted and Purchased 7,50,000
Rebate on Bills Discounted (on 31-3-2014) 10,000
Branch Adjustments (Cr.) 25,000
Commission, Exchange received 45,000
Library - Books 12,000
Repairs to Bank Property 8,000
Gold Bullion 1,50,000

80
Adjustments :
1. Provide depreciation at 5% on Premises and at 10% on Furniture. (On
original cost of the assets)

2. Provide Rs. 58,000 for Bad and Doubtful Debts.

3. Rebate on Bills Discounted as on 31-3-2015 amounted to Rs. 16,500 for

unexpired period.

4. Loans advanced by bank included a sum of Rs. 1,00,000 due from a

customer against the mortgage of his machinery. As the client is unable to
pay the amount, the bank takes over the machinery at the market value of
Rs. 70,000 in full satisfaction of its claim on the date of Trial Balance.

qqq

81
 5
Financial Statements of Insurance
Companies

Unit-1 : Introduction to Insurance Business

Learning Objectives
After studying this unit, you will be able to:
♦ Understand the basic concepts of Insurance.
♦ Learn the meaning of some important terms used in insurance business, namely
premium, considerations for annuities granted, claims, surrender value, bonus, paid-
up policy, re-insurance and agents’ balances.
♦ Learn two main types of insurance business i.e. life insurance and general insurance
and will be able to distinguish between them.
♦ Understand the meaning and various types of fire, marine and miscellaneous
policies.
♦ Provisions 11 of the Insurance Act, 1938 requiring preparation of financial
statements for the insurance business and Section 14 of the Act requiring
maintenance of register or record of policies.

1.1 Introduction
Insurance is a contract. Here one party the Insurance Company called “Insurer”
undertakes to indemnify specified losses suffered by the other party called “Insured”
for a special consideration called “Premium”. The term of the Insurance contract is
called “Insurance Policy”.
Some Important terms used in Insurance Business:-
1. Insurance Policy: It is the document issued by the insurance company containing terms of
the insurance contract. It specifies the losses that are covered by the Policies and also the
maximum amount that can be paid out in the event of a loss/death. This is called Policy Amount.
2. Premium: The payment made by the insured to the Insurance Company in
consideration of the contract of Insurance. The premium is generally paid annually. In some

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.2

cases it may be paid at shorter intervals. A point to be noted is the premium amount has to be
paid “front end” i.e. before the commencement of the insurance cover/policy.
3. Claims: A claim occurs when a policy fall due for payment. In Life Insurance it arises on
death or on maturity of policy. In case of General Insurance, the claim arises only when the
loss occurs. while calculating the claim outstanding at the end, the claim intimated as well as
the claim intimated and accepted both are considered. The adjustment entry required for this
will be as follows:
Claims account Dr.
To Claims intimated and accepted but not paid account
To Claims intimated but not accepted and paid account
At the commencement of the next period a reverse entry is passed, so that when these claims
intimated are paid, they may not influence the claims account of next year. However, if
company rejects any claim, such amount should be transferred to the insurance fund account
and not to the claims account.
Illustration 1
From the following, you are required to calculate the loss on account of claim to be shown in
the revenue account for the year ending 31st December, 2011:
Claim intimated in the Claim admitted in the Claim paid in the year `
year year
2010 2010 2011 15,000
2011 2011 2012 10,000
2009 2010 2010 5,000
2009 2010 2011 12,000
2011 2012 2012 8,000
2011 2011 2011 1,02,000
Claim on account of Re-insurance was ` 25,000.
Solution
`
Total claim paid in 2011 : ` (1,02,000 + 12,000 + 15,000) 1,29,000
Less: Outstanding in the beginning, i.e., intimated in 2010 or earlier
whether accepted in 2010 accepted in 2011(` 15,000+ ` 12,000) (27,000)
1,02,000
Add: Outstanding at the end, i.e., intimated in 2011 whether accepted in
2011 or in 2012 ` (10,000 + 8,000) 18,000
1,20,000
Less: Re-insurance claim (25,000)
Claims to be shown in revenue account 95,000

© The Institute of Chartered Accountants of India

 5.3 Advanced Accounting

4. Surrender Value: When the policy holder wishes to realise the amount of policy before
the expiry of the full period of the policy, he surrenders his right under the policy and is paid
an amount calculated by a fixed formula. “Surrender Value” applies only to Life Insurance
policies and comes into play only after two annual premiums have been paid.
5. Commission: Generally, Insurance Companies get business through agents; these agents
receive commission on the basis of the amount of premium they generate for the Insurance
Company. Commission paid to Agents is shown as a debit (expense) in the Revenue Accounts.
Bonus (applicable only to Life Insurance): A life insurance policy may be “with profit” or
“without profits”. The holder of a “without profits” policy is entitled to receive on maturity
only the amount specified in the policy; but on a “with profits” policy he is entitled to
receive in addition, the amount of bonuses declared on each valuation. On each
valuation, the amount standing to the credit of Life Fund which is in excess over net liability,
as determined by the actuary, is distributed among the shareholders and the policyholders.
The share of the policyholders is paid to them as bonus, either in cash on declaration or by
reduction of future premiums, or on maturity of the policy. Until the bonus is paid, it does not
figure in the Revenue Account and is not payable in cash immediately but is to be payable at
the time of the claim; it is described as Reversionary Bonus. The amount of Reversionary
Bonus is included in claims.
Interim Bonus: It is a bonus paid to a policyholder for a period for which valuation is not
complete and, therefore, the exact profit or bonus has not been determined. Such a bonus is
also included in claims.
7. Reinsurance: If Insurance Company does not wish to bear the whole of risk of a policy, then it
will reinsure a part of risk with some other insurer. In such a case the insurer is said to have ceded
a part of its business to other insurer .i.e. the risk of the insurance is being underwritten by another
Insurance Company.
In other words, in Re Insurance business transaction is defined as an agreement between the
Ceding Company and the Reinsurer, where the former agrees to cede (give) and the later agrees
to accept certain specified share of risk in return for a share of the premium. In such a case, on a
claim arising, the claim will be shared between the two companies in the proportion they had
agreed to underwrite the risk.
8. Ceding Company: An insurance company that shifts part or all of a risk it has assumed to
another insurance company. The Ceding company shares the premium amount it has received to
cover the risk, with the second insurance company called the Reinsurer. In return the Reinsurer
company pays commission to the Ceding company for getting the business.
9. Commission on re-insurance ceded /accepted: Insurance companies get business through
its agents. Such agents receive commission on the basis of the amount of business they generate
for the company. When company gets re-insurance business it has to pay commission to the
Ceding company also. This commission paid by the reinsurance company is called ‘commission
on re-insurance accepted’ and is shown as an expense in the revenue account of the re insurance
company.

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.4

For the ceding company, when it passes on a part of the business to the reinsurance company
then the Ceding company gets its commission from the re insurance company. This commission is
called ‘commission on re-insurance ceded’. It is a gain to the company surrendering the business.
It appears on the credit side of revenue account.
Other Terms Used in Insurance Business
1. Paid Up Policy (Applicable only to Life Insurance): If an insured is unable to continue
to paying premiums on his life policy, he may discontinue the payment and convert the policy
into a “Paid-up” policy. The insured amount in that case will be reduced to a figure ascertained
according to the following formula:
No. of premium paid × Sum assured
Paid-up value =
Total No. of premium payable
Other conditions of the policy, however, will remain unchanged.
2. Annuity: It is a contract that provides an income for a specific period of time to say for a
number of years or for life. The person receiving the payment is called an annuitant. Annuity
payments are usually made monthly but can be quarterly, semi-annually, or annually.
3. Catastrophic Loss: A loss (or related losses) which is unbearable i.e. it causes severe
consequences such as bankruptcy to a family, organization, or insurer.
4. Bonus in Reduction of Premium: In all the cases of general insurance the policy is always
taken for one year and it is to be renewed after the expiry of the policy. Whether the policy is
renewed with the same company, or a fresh policy is taken with some other company, it is a
standing practice that the company usually grants a reduction in premium at the prescribed rate if
the insured has not made any claim. This rate of reduction increases every year for usually three
years if the insured does not make any claim continuously year after year.
For example, the General Insurance Companies in India allow the following rates of reduction
for a motor cycle: 1st year 15%; 2nd year 25%; 3rd year 30%. This reduction is called bonus in
reduction of premium.
In fact this transaction should be divided into two parts-first, the total premium (without any
reduction) should be assumed to be received and then reduction granted should be assumed
to be paid separately.
Thus, total premium (without reduction) should be treated as income and bonus which is
subtracted should be treated as an expense. Thus-
• If net premium received is ` 12,600
• Bonus in reduction of premium is ` 1,400
• The revenue account on the credit side will show ` 14,000 (` 12,600 + ` 1,400) as
income and on the debit side ` 1,400 as an expense.
• The journal entry is :
Bonus in reduction of premium account Dr.
To Premium account

© The Institute of Chartered Accountants of India

 5.5 Advanced Accounting

1.1.1 Principles of Insurance

There are several principles governing insurance business, the important of which are
discussed below.
(a) Principle of indemnity: Insurance is a contract of indemnity. The insurer is called
indemnifier and the insured is the indemnified. In a contract of indemnity, only those who
suffer loss are compensated to the extent of actual loss suffered by them. One cannot make
profit by insuring his risks.
(b) Insurable interest: All and sundry cannot enter into contracts of insurance. For example,
A cannot insure the life of B who is a total stranger. But if B. happens to be his wife or his
debtor or business manager, A has insurable interest i.e vested interest and therefore he can
insure the life of B. For every type of policy insurable interest is insisted upon. In the absence
of such interest the contract will amount to a wagering contract.
(c) Principle of uberrimae fidei: Under ordinary law of contract there is no positive duty to
tell the whole truth in relation to the subject-matter of the contract. There is only the negative
obligation to tell nothing but the truth. In a contract of insurance, however there is an implied
condition that each party must disclose every material fact known to him. This is because all
contracts of insurance are contracts of uberrima fidei, i.e., contracts of utmost good faith. This
is because the assessment of the risk and the determination of the premium by the insurer
depend on the full and frank disclosure of all material facts in the proposal form.

1.2 Various Types of Insurance

Basically insurance is divided into two broad types viz;

Insurance

Life Insurance General Insurance

1.2.1 Life insurance policy

It covers the “life-risk” of the insured person. In case of death, the nominee will get the
Insurance Policy amount. In life insurance the amount is payable on the happening of an event
which is bound to occur i.e. death. So this form of Insurance is also described as “Assurance”.
However, the life insurance policy also provides for payment of the policy value at maturity or
by instalments and an agreed bonus. This payment may either be in lumpsum on maturity
of the policy or may be paid in instalments called annuity.

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.6

The uses of the terms "insurance" and "assurance" are sometimes confused. “Insurance"
refers to providing cover for an event that might happen (fire, theft, flood, etc.), while
"Assurance" is the provision of cover for an event that is certain to happen like death and so
Life insurance is actually Life Assurance
Life Insurance can be further classified into 3 types:

Life Insurance

Whole Life Assurance Term Assurance Annuity

Whole Life Assurance: In whole life assurance, policy amount is paid only on the death of
Insured.
Term Assurance: Here the policy amount is paid in “lump-sum” on maturity of the term of the
Life Insurance Policy (say 20 years).
Annuity: On maturity of the policy, instead of a one shot “lump-sum” payment the policy
amount is disbursed in instalments, generally monthly.

1.2.2 General insurance

It means insurance other than life insurance
Section 2(6B) of the Insurance Act defines ‘General Insurance Business’ as fire, marine or
miscellaneous insurance business whether carried on singly or in combination with one or
more of them.
Some common types of miscellaneous insurance in India are: exchange risk insurance,
motor vehicle insurance, credit insurance, burglary insurance, workmen’s compensation
insurance, professional liability insurance, cash in transit insurance, fidelity insurance, etc.

1.3 Various types of General Insurance

General Insurance is broadly classified into three major categories:
1. Fire Insurance
2. Marine Insurance
3. Miscellaneous Insurance
In general insurance, the policy is taken for one year at a time and can be renewed yearly or a
fresh policy can be taken with some other insurance company.

© The Institute of Chartered Accountants of India

 5.7 Advanced Accounting

General Insurance

Fire Insurance Marine Insurance Miscellaneous

Valued Policy
Time Policy Motor Vehicle Insurance

Specific Policy

Voyage Policy
Fidelity Insurance
Average Policy

Mixed Policy
Credit Insurance
Floating Policy

Floating Policy
Excess Policy Burglary Insurance

Blanket Policy
Loss of Profit Insurance
Blanket Policy

Fleet Insurance
Comprehensive Policy Workmen’s
Policy Compensation

Open Policy
Consequential loss Professional Liability
policy Insurance
Port Policy
Re-instatement
policy

Composite Policy
Open declaration
policy

Valued Policy

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.8

The three types of General Insurance:

1.3.1 Fire Insurance

A fire insurance contract may be defined as an agreement whereby one party, for a
consideration, undertakes to indemnify the other party upto an agreed amount against
financial loss of goods or property which the latter may suffer because of fire. Fire insur-
ance thus covers the risk of loss of property by accidental and non-intentional fire.
Types of Fire Policies
(i) Valued policy - A policy in which the value of the property is ascertained and/or agreed
upon which the insurer undertakes to pay in the event of destruction of goods/property by
fire is known as valued policy. This type of policy is not very common these days.
(ii) Specific policy - It is a policy which insures a risk for a specific amount. In case of any loss
under this policy, the insurer pays whole loss provided it is not more than the sum specified in
the policy. Thus, the value of the goods/property is not considered for this purpose.
(iii) Average policy - An average policy contains the ‘average clause’ which lays down that if
the property is under-insured, i.e. insured for a sum smaller than the value of the
property, the insurer will bear only that proportion of the actual loss which the sum
assured bears to the actual value of the property at the time of loss.
(iv) Floating policy - It is the policy which covers several types of goods lying at different
locations under one amount and for one premium. The premium normally charged under
this policy is the average of the premia that would have been paid if each lot of the goods
had been insured under specific policies for specific sums.
(v) Excess policy - Where the stocks of the insured fluctuate he may take out a policy for
the amount below which his stocks normally do not fall and another policy to cover the
maximum amount of stocks which may be reached at times. The former type of policy is
known as the First Loss Policy and the latter as the Excess Policy.
(vi) Blanket policy - A blanket policy is that which covers all assets - fixed as well as current
- under one policy.
(vii) Comprehensive policy - A policy which covers risks such as fire, flood, riots, strikes,
burglary etc. upto a certain specified amount is known as the comprehensive policy.
(viii) Consequential loss policy - The objective of this policy is to indemnify the insured
against the loss or profit caused by any interruption of business due to fire. It is also
known as Loss of Profit Policy.
(ix) Re-instatement policy - It is a policy under which the insurer pays the amount which is
sufficient to re-instate assets or property destroyed.
(x) Open declaration policy - It is a policy whereby the insured makes a deposit with the
insurer and declares the value of the subject matter in respect of which risk is covered.
Such policies are normally taken where the value of stocks etc. fluctuates considerably.

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 5.9 Advanced Accounting

1.3.2 Marine Insurance

Marine insurance is perhaps the oldest type of insurance. Under a contract of marine
insurance, the insurance company or the underwriter agrees to indemnify the owner of a
ship or cargo against risks which are incidental to marine adventure such as sinking or
burning of the ship and its contents, stranding of the ship, collision of ship, Jettison,
i.e., throwing overboard the cargo into the sea to save the ship from sinking or some other
imminent danger, barratry, i.e., wrongful act of the captain of the ship in destroying or stealing
the vessel or cargo causing loss to owners.
Types of Marine Insurance - The common types of marine insurance are as follows :
(i) Cargo insurance - This type of marine insurance covers risks to the cargo on the ship.
The cargo on the ship is exposed to risks arising from an act of God, enemies, fire etc.
(ii) Hull insurance - The ship is also exposed to the perils described in (i) above. Therefore,
the owner of the ship may effect ‘hull’ insurance to cover such perils.
(iii) Freight insurance - Where the owner of goods promises or undertakes to pay the freight
when the cargo is safely delivered at the port of destination and the cargo is destroyed
on the way, the shipping company would lose the freight. The shipping company can
cover this risk by taking out a freight insurance policy.
The persons who insure cargo, hull or freight are known as underwriters because they
write their name and sign at the foot of the policy. Originally, only individuals used to
underwrite the policies in their own names. Later associations were formed for this purpose,
the pioneer being the Lloyd’s Association which was formed in 1774. In the year 1779, the
Association adopted a definite policy known as the “Lloyd’s policy” which is in use even now.
Types of Marine Losses - Marine losses may be broadly of two types –

(i) Total Loss : When the subject matter of insurance, i.e., cargo, ship, freight etc. is totally
lost, it is known as a ‘total loss’. Total loss is also of two types:
(a) Actual Total Loss - When the subject-matter of insurance is absolutely destroyed
or totally lost to the insured, it is known as actual total loss.

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 Financial Statements of Insurance Companies 5.10

(b) Constructive Total Loss - When the subject matter is not actually totally lost but is
lost for all practical purposes e.g., where the ship or cargo is reasonably abandoned
and taken as lost or expenses to be incurred for saving the cargo or the ship are
expected to be more than the value thereof, it is known as constructive total loss.
(ii) Partial Loss : When only a part of the subject matter is lost, it is known as partial loss.
This loss may also be of two types as discussed below :
(a) General Average Loss - Such a loss is caused by extraordinary voluntary sacrifice
made or expenditure incurred with the objective of protecting the interests of all
owners in a voyage. An example of this type of loss is when the ship has run
aground and part of the cargo is to be jettisoned to lighten the ship to save it as well
as the cargo from total loss.
(b) Particular Average Loss - It is a partial loss of the subject matter of insurance
caused by a peril against which it is insured but which is not a general average loss.
Types of Marine Insurance Policies - Generally a standard form for all policies is used for all
marine insurance policies to cover various types of risks. However, differing needs of the
insured have led to the evolution of a variety of marine insurance policies, the main among
which are:
(i) Time policy - It is that policy which covers the risk of the subject matter for a specified period
of time. It is generally used for hull insurance though it can be taken out also for cargo.
(ii) Voyage policy - This is a policy whereby the subject matter in transit is insured from one place
to another. It is generally carried out for cargo which is exposed to marine risks in transit.
(iii) Mixed policy - This is also known as time and voyage policy as under this the subject
matter on a particular voyage is insured for a specified period of time.
(iv) Floating policy - This policy is taken out by cargo owners who make regular shipments
of cargo to insure the shipments expected to be shipped for a certain time by one policy.
At the time the cargo is shipped, the insured declares the value of the shipment and the
total value of the policy is reduced by that amount.
(v) Blanket policy - This policy is taken for a specified amount, the premium in respect of
which is paid for the entire policy at the beginning itself and is adjusted at the end of the
specified period for the value of risks covered during this period.
(vi) Fleet insurance policy - This policy insures the whole fleet of ships.
(vii) Open policy - This type of policy is taken out without specifying the value where at the
time of insurance, the insured is not aware of the value of the subject matter to be
insured, which is ascertained and declared to the insurer later. The insurance cover is
subject to the limit of the sum assured.
(viii) Port policy - This policy covers the ship when it is docked/stationed at a port.

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 5.11 Advanced Accounting

(ix) Composite policy - It is a policy underwritten by more than one underwriter. The liability
of each underwriter is however distinct and separate.
(x) Valued policy - Under this policy, the value of the subject matter is agreed between the
underwriters and the insured at the time of taking the policy and is specified therein.
Clauses in a Marine Policy:
A marine policy may cover or exclude various types of risks. In view of this some special
clauses may be inserted in the policy. Some of the important clauses are discussed below:
(i) Lost or Not Lost Clause - When this clause is inserted in the policy, the goods net
insured irrespective of whether they are already lost or not lost before the policy is taken
out. In other words, it covers loss of goods occurring between shipment of goods and the
issuance of policy.
(ii) Waiver Clause - When this clause is included in a marine policy no act of the insurer or
the insured in saving, maintaining and preserving the cargo or the hull will be considered
as a “waiver”, i.e., in case the insured takes steps under Sue, Labour and Travel clause
after the notice of abandonment is given by him to the insurer but is not accepted by the
insurer, it will not amount that the notice of abandonment is waived. Thus, if the insurer
takes any such steps, it cannot be taken to mean as an acceptance of the notice of
abandonment.
(iii) Permission to Touch and Stay Clause - As per this clause, the ship is permitted to
touch and stay at the ports mentioned in the policy in the order specified therein. In case
nothing is specified, the ship must touch and stay at ports which are normally touched in
the particular trade. Any deviation from the route specified is permitted in an emergency
to save the ship and the lives of the passengers.
(iv) Running Down Clause (RDC) - This clause enables the insured to claim the loss caused
by collision with another ship.
(v) Free of Capture and Seizure Clause (FCS) - This clause is included in the policy to
clarify that the underwriters will not be liable for any loss caused by ship being captured
or seized in a war or warlike situation.
(vi) Continuation Clause - This clause may be included in a time policy whereby the ship
will be covered until the end of the voyage or for not more than 30 days thereafter where
the ship is still at sea at the time of expiry of the policy. A monthly pro rata premium is
required to be deposited for this purpose.
(vii) Excepted Perils Clause - This clause specifies the risks not covered by the insurance
policy.
(viii) Free of Particular Average (FPA) and Free of All Averages (FAA) Clauses - As the
names suggest, the FPA clause exempts the underwriter from particular average and all
averages, i.e., both general and particular average liabilities (discussed hereinafter).

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 Financial Statements of Insurance Companies 5.12

(ix) Insurance Clause - This clause covers, among others, the losses caused by the
negligence of master, crew etc. or by explosives or by other defects in machinery of the
ship.
(x) Jettison Clause - This clause covers the loss caused by jettisoning of goods, i.e., throwing
overboard goods to reduce the weight of the ship and prevent capture by the enemy.
(xi) Barratry - This clause covers all losses caused by willful misconduct or defaults of the
master and crew of the ship.

1.3.3 Miscellaneous Insurance Policies

In addition to the types of general insurance business discussed above, there are a number of
insurance policies which cover various other types of risks, the important ones of which are
discussed hereinafter.
Motor Vehicle Insurance - Motor Vehicle insurance policies are normally taken out to cover two
types of risk—(i) the risk of damage by an accident or loss by theft, and (ii) risk of liability arising
from an injury or death of any person in an accident caused by a vehicle, commonly known as
Third Party Insurance. The owner of a vehicle is compulsorily required to get third party insurance
under the Indian Motor Vehicles Act whereas the other types of insurance are voluntary.
Fidelity Insurance - This type of insurance protects an employer against the frauds,
defalcations etc., on the part of his employees where, as part of their employment obligations,
such employees are required to handle cash, goods or other valuables of the employer.
Credit Insurance - Credit insurance is taken out to protect the insured against the losses
caused by bad debts due to insolvency of the debtors or otherwise.
Burglary Insurance - Burglary insurance policy is issued whereby the insurer undertakes to
indemnify the insured against losses from burglary, i.e., the removal of movable goods by theft
or burglary.
Loss of Profit Insurance - Loss of profits insurance is often accompanied by fire insurance
and it covers the risk of loss of profits caused by fire, including fixed costs which are continued
to be incurred till the business starts functioning at its normal level.
Workmen’s Compensation Insurance - This type of insurance covers the risk of liability
arising on account of payment of compensation where a worker suffers injury or dies in an
accident in the course of his employment.
Professional Liability Insurance - Professional liability insurance protects the professionals,
such as doctors, lawyers and accountants, against the risk of liabilities arising towards clients
of third parties in connection with their work. This may also include legal expenses incurred in
defending law suits.
The scope of miscellaneous insurance business is very wide and encompasses almost all
commercial activity.

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 5.13 Advanced Accounting

Important points to be remembered

¾ Only in general insurance policy the insured gets compensation only in case of loss
sustained by him due to reasons specified in the policy.
¾ In India life insurance business can be conducted only by the Insurance Corporation of
India, set up under an Act of Parliament; general insurance business is also taken over
by the Government and four general insurance companies are now in operation with
General Insurance Corporation of India as the holding company.

1.4 Distinction between Life Insurance and Other Forms of

Insurance
Life Insurance Other Insurance
1. Timing of Insurable amount is payable Reimbursement of loss or liability
Payment of either on the happening of the incurred will be paid at the
Claim event (death) or at the happening of the uncertain event
maturity only.
2. Value of Policy Insurance can be done for any The sum payable under it is limited
value depending upon the to the amount of loss actually
premiums the insured is suffered or the liability incurred,
willing to pay. notwithstanding the amount of
policy.
3. Duration of -These are long term These are only for one year though
Contract contracts running over the renewable after year.
number of years.
4. Assurance Life insurance is known also Other policies are known as
by another term ‘assurance’ insurance.
since the insured gets an
assured sum.
5. Determination Actuaries periodically estimate A portion of the premium is carried
of Liability the liability under existing forward as a provision for
policies. On that basis a unexpired liability and the balance
valuation balance sheet is net of claims and expenses is
prepared to determine the taken as profit or loss.
profit

1.5 Some Relevant Provisions of the Insurance Act, 1938

The general insurance business in India is governed by the Insurance Act, 1938 which is
based on the British Insurance Act. The Act was amended in 1969 for ‘social control’ to govern

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 Financial Statements of Insurance Companies 5.14

the general insurance business on healthy lines. However, it was felt that there still existed
some scope for improvement. In view of this, on May 13, 1971 the government nationalised
the general insurance industry by an ordinance which became the General Insurance
(Nationalisation) Act, 1972. At that time there were 63 domestic insurance companies and 44
foreign insurance companies operating in India. The managements of all the 107 companies
were taken over by the Government and accordingly the General Insurance Corporation (GIC)
was formed as a government company in November 1972. The GIC as the holding company is
entrusted with the task of superintending, controlling and carrying on the general insurance
business in the country. Its subsidiaries in all the four zones of the country viz., the Oriental
Fire & General Insurance Company (now known as the Oriental Insurance Co. Ltd.), the
National Insurance Company Ltd., the New India Assurance Company Ltd. and the United
India Insurances Company do all classes of direct business of general insurance except
aviation which is done by the GIC.
The Insurance Act, 1938 and the rules framed there under have an important bearing on the
preparation of accounts of insurance companies. Some of the provisions have become
irrelevant after the nationalization of general insurance. Some provisions have been amended
by IRDA Act, 1999 and these have been separately listed.
(1) Forms for final accounts [Section 11(1)]. Every insurer should prepare the balance
sheet in accordance with the regulations contained in Part I of the First Schedule and in form
set forth in Part II of that Schedule. The balance sheet provides three columns, namely life
and annuity business, other classes of business and total. Profit and loss account and the
appropriation account are to be prepared in form B and C respectively given in Part II of the
same schedule. Revenue accounts are to be prepared in accordance with the forms given in
the Third Schedule in respect of each class of insurance business. These forms are given in
relevant sections.
(2) Audit: The Act provides that the company carrying on general insurance business be
audited as per the requirements of the Companies act, 1956.
(3) Register of policies (Section 14): Every insurer must maintain a register of record of
policies showing in respect of every policy, the names and addresses of policyholders, the
date when the policy was effected and record of any transfer, assignment or nomination of
which the insurer has notice.
(4) Register of claims: The insurer must also maintain a register of claims, giving the details
of claim made such as date of the claim, the name and address of the claimant and the date
on which the claim was discharged. If the claim was rejected, the date of rejection and the
reasons there for. Apart from these there are other statutory records to be maintained and
they are listed in a separate section.
(5) Approved investments (Section 27B): A company carrying on general insurance
business must invest its funds only in approved securities listed in this section.

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 5.15 Advanced Accounting

(6) Payment of commission to authorized agents (Section 40): The Act prohibits payment
of commission to any person other than authorized agent for soliciting or procuring business,
subject to a maximum of 15% of the premium.
(7) Limit on expenditure [Section 40A(3)]: Expenditure by way of commission which
normally ranges within the limits of 5 to 15% subject to the review by GIC.` Sec. 40C of the
Insurance Act, 1938 prescribes the limitation on expenses of management in general
insurance business. Rule 17E of the Insurance Rules, 1938 provides for the computation of
the limit on expenses of management. A certificate signed by the chairman and two directors
must state that all expenses of management have been fully debited to the revenue account.
(8) Section 64VA of the Insurance Act, 1938 requires every insurer to maintain an excess of
the value of its assets over the amount of its liabilities at all times. The excess is known as
solvency margin.

1.6 Insurance Regulatory and Development Authority Act, 1999

(Some Relevant Amendments In Insurance Act, 1938)
The Insurance Regulatory and Development Authority Act, 1999 is an act to provide for the
establishment of an Authority to protect the interests of holders of insurance policies, to
regulate, promote and ensure orderly growth of the insurance industry and for matters
connected therewith or incidental thereto and further to amend the Insurance Act, 1938 the
Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalisation)
Act, 1972 to end the monopoly of the Life Insurance Corporation of India (for the insurance
business) and General Insurance Corporation and its subsidiaries (for general insurance
business).
The Act was published in the Gazette of India on 29th Dec., 1999 and extends to the whole of
India. Words and expressions used and not defined in this Act but defined in the Insurance Act,
1938 or the Life Insurance Corporation Act, 1956 or the General Insurance Business
(Nationalisation) Act, 1972 shall have the meanings respectively assigned to them in those Acts.
Applicable to Schedule A Schedule B
Life Insurance Business General Insurance
Business
Premium is recognised When due • Over contract priod or
period of risk
• Unearned premium is a
Current Liability and
Reserve have to be
created for it.
• Premium in advance is
also a Current Liability
Premium deficiency is Expected claims + Expenses etc. Expected claims + Expenses,
recognised if: are more than expected premium. etc, are more than expected

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 Financial Statements of Insurance Companies 5.16

premium for contracts more

that 4 years, it used actuarial
valuation.
Acquisition Cost = Expenses in the year in which Expenses in the year in which
Expenses acquiring or they are incurred they are incurred.
renewal policy
Claims Policy Benefit Amount + Claim Claims for losses incurred +
settlement cost Settlement cost
+ Claims incurred but not
Reported (IBNR)
+ Claims incurred but not
enough reported (IBNER)
treated in Outstanding
claims.
Actuarial Valuation If for LIP business in force certificate Actuarial valuation is required
for liability is in pursuant to annual for contracts more than 4
inviting of LIB. Assumption is noted years. Necessary provision for
to account. unexpired risk may be made.
Investment • Valued at historical cost • Valued at historical cost
a) Real Estate Investment • Revaluation in 3 years; (-) Depreciation
Properties transfer to Revaluation (-) impairment loss
Reserve.
• Profit on investment = • Impairment loss is
Revaluation Reserve + Profit transferred to Profit and
above carrying amount. Loss Account.
• Revaluation Reserve is not • No Revaluation is
available for Shareholder but it required
is available for Policyholder to
certain extent as bonus.
• Impairment loss is
transferred to Profit and Loss
Account
• Impairment losses on
revalued asset is transferred
to revaluation Account
b) Debt Security including Considered as held to maturity
Govt. Securities and and measured at historical cost
Preference Share Capital subject to amortisation.
c) Equity Security and • Measured at Fair Market • Measured at FMV
derivative Instruments Value (FMV) • FMV = Least of closing
traded activity • FMV = Least of closing prices on stock exchange

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 5.17 Advanced Accounting

(Unit sold/purchased more prices on the stock • Unrealised gains/loss due

10,000 units per annum) exchange to change in FMV is
• Unrealised gain / losses taken to Fair Value
due to changes in FMV is Change Account.
taken to Fair Value • The actual Profit or Loss
Change A/c. on the sale of investment
• The actual profits/loss on and FVC account is
the sale of investment and transferred to Profit and
Fair value change account Loss Account.
is transferred to Revenue/ • Till then FVC Account is
Profit and Loss. Till then not available for dividend
FVC A/c is not available to • For declaring the
Shareholders for dividend dividend, the company
and only specific available can use free Reserve
for bonus for policyholders. Debts of FVC account.
d) Unlisted and other non- • Kept at historical cost • Kept at Historical cost
actively traded equity • Provision for diminution it • Provision for diminution is
shares and derivatives can be reversed in case of made if decrease in
Instruments. increase but the carrying value. The carrying
(Non-active if trading Vol. amount cannot be more amount cannot exceed
does not exceed 10,000 than historical cost. historical cost.
units of that securties)
Loans • At historical cost subject to • At historical cost subject
impairment provision. to impairment provision.
• Provision for impairment = • Provision for impairment
Loan for which: = Loan for which:
1. Interest remaining 1. Interest remaining
unpaid over 6 months. unpaid over 6
2. Interest falling due and months.
unpaid for 6 months. 2. Interest falling due
and unpaid for 6
months.
Catastrophe Reserve It has to be created in
accordance of norms and
used for meeting unexpected
losses which are not specified
and known in advance.
Linked Business Valuation of interest on principle
above. A separate set for each
segregated fund means
investment for policyholders who
bear investment risk.

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 Financial Statements of Insurance Companies 5.18

Important amendments made to the earlier Act by the IRDA Act, 1999
(1) It is mandatory for every Insurer on or after the commencement of this Act, to prepare a
balance sheet, a profit and loss account, a separate receipts and payments account, a
revenue account in respect of insurance business transacted by him and in respect of his
shareholders funds. The accounts are to be prepared for every financial year instead of the
calendar year. The accounting year has already been changed to financial year when
insurance companies prepared the accounts for 15 months ending with the financial year
1988-89, in response to Government directive. The directive might have become necessary
because of the change in the previous year effected by Income Tax Act. The Act was
amended requiring previous year to be the financial year.
(2) Every insurer must keep separate accounts relating to funds of shareholders and
policyholders.
(3) Insurers are prohibited from investing either directly or indirectly their funds outside India.
(4) The Regulatory Authority has the power to direct the insurers to invest funds in infra
structure and social sectors subject to certain conditions. The authority in general has the
power to direct the time, manner and other conditions of investment with a view to protect the
interests of policyholders. The amendment raises commission on fire and marine policies from
the previous 10% to 15%.
(6) There is a necessity for insurers to keep a required solvency margin. The margin refers
to the excess of assets over liabilities. If an insurer does not maintain such a margin, he has to
submit a financial plan indicating a plan to correct the deficiency. If these requirements are not
met to the satisfaction of the Authority, the insurer may be deemed to be insolvent and the
company may be wound up by the court.
(7) Every insurer must submit to the Authority a prescribed return certified by an actuary in
the case of life business and certified by an auditor in the case of general insurance business
to show that the required solvency margin has been maintained.
(8) Every insurer carrying on general insurance business is required to create a
‘Catastrophe Reserve’ to meet the future potential liability against the insurance policies in.
force. This reserve is not created for any specific or known purpose. Creation of this reserve
should be in accordance with the regulations issued by the Authority. So far the Authority has
not issued any regulation in this regard.
References:
Study on Audit of companies carrying on General Insurance Business published by the Institute of
Chartered Accountants of India; Insurance Act, 1938; General Insurance (Nationalisation) Act,
1972; Life Insurance Corporation Act, 1956; and Insurance Regulatory and Development Authority
Act, 1999, Insurance Regulatory and Development Authority Regulations, 2002 .

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 5.19 Advanced Accounting

Summary
• Claims: it refers to the amount payable by insurer to the insured when policy becomes
due or the mishappening occurs.
Claim = Claim intimated + Survey fees + Medical expenses – Claims received on
insurance.
• Premium: it refers to the consideration received by the insurance company to undertake
the risk of the loss. It is always net of premium paid on reinsurance.
• Annuity (LIC): it is fixed annual payment received regularly till insured lives. This is in
consideration of lumpsum money paid by him in the beginning of the policy.
• Bonus: the profit of LIC is distributed among the shareholders and policy holders. The
policy holders get 95% of the profit of LIC by way of bonus. The bonus may be of
following types:
¾ Cash Bonus: paid on declaration of bonus in cash.
¾ Revisionary Bonus: it is paid with the policy maturity instead of cash amount now.
This bonus is added in the amount of claims.
¾ Bonus in reduction of Premium: Bonus is not paid in cash but adjusted against the
future premiums.
¾ Interim Bonus: it refers to bonus paid on the maturity of policy in the year for which
the profit has not yet been determined. Such a bonus is included in claims.
• Reinsurance : if an insurer is not willing to bear the whole of the risk, it reinsure itself.
Some risk retains with some other insurer.

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 Financial Statements of Insurance Companies 5.20

Unit - 2 : Accounting Technique of General Insurance Business

Learning Objectives
After studying this unit, you will be able to:
♦ Understand the issues involved in the general insurance and learn the books of
accounts/records which should be maintained at the divisional office of a general
insurance company.
♦ Familiarize with the format of claim statement and try to understand how to compile
the claim provisions.
♦ Understand the meaning of claims paid, co-insurance, outstanding premium and
commission. Insurance companies debit all management expenses to a control
account in the general ledger. Learn the technique of accounting of the management
expenses and analysis thereof.
♦ Be familiar with the details of loans and investments of an insurance business and the
books and records normally maintained in the investment department of an insurance
company.
♦ Learn the technique of creating unexpired risks reserve in case of fire, marine, and
miscellaneous insurance business.
♦ Understand the concept of re-insurance

2.1 Functional Divisions and Books of Accounts Maintained Therein

Considering the nature and spread of the general insurance business, the four subsidiaries of
the General Insurance Corporation operate through their Head Offices, Regional/Area Offices,
Divisions and Branches attached thereto.
The most important part of the business operations comprises the issuance of policies for
risks assumed and to indemnify the insured for losses to the extent covered by such policies.
In financial terms these operations get translated into—
(a) the receipt/recording of premium income; and
(b) the recording and settlement of claims for losses.
The business operations stated above are essentially confined to the divisional offices and the
branches attached to these divisions. The accounting for these operations in these offices
involve recording of premium income and provisions and payments in respect of claims under
policies. Transactions related to operations at the branches are communicated for accounting
thereof at the divisions. Generally, separate bank accounts are maintained for premium
collections and for disbursement of expenditure. Normally, collections are transmitted to the
relevant controlling office and the concerned account is not normally operated upon for
expenditure etc. The branches of the divisions submit adequate information and evidence of

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 5.21 Advanced Accounting

transactions relating to their operations. The returns from the branches will include all
transactions by way of documents relating to premium received, claims provisions and
payments and operation of bank accounts.
The following books of account/records are normally maintained at a divisional office:
(i) Cash Receipt Book.
(ii) Cash Disbursement Book.
(iii) Dishonoured Cheque Register.
(iv) State Cheque Register.
(v) Daily Cash Balance Book.
(vi) Claims Disbursement Book.
(vii) Premium Register.
(viii) Bank Transfer Journal.
(ix) Journal.
(x) Summary Books for incorporation of Branch Returns (Cash Receipt Statements, Cash
Disbursement Statements and Premium Register after these are duly checked).
(xi) General Ledger.
(xii) Sub-Ledgers.
(xiii) Register for Analysis of Management Expenses.
(xiv) Cash Receipts, Cash Disbursement Vouchers and Journal Vouchers.
(xv) Remittances Received Register.
(xvi) Salvage Register.
(xvii) Claims Recovery Register.
(xviii) Stationary Register.
(xix) Trunk Call Register.
(xx) Assets Register.
(xxi) Policy Stamp Register.
(xxii) Excess/Shortage Register.
(xxiii) Co-insurers Register.
Other major areas of accounting involve accounting for investments, reinsurance and other
administrative matters which are dealt with at the Head Office.

2.2 Claims Provision at Divisional Offices

The outstanding liability at the year-end is determined at the divisions/branches where the
liability originates for outstanding claims. Thereafter, based on the total consolidated figure for

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 Financial Statements of Insurance Companies 5.22

all the divisions/branches, the Head Office considers a further provision in respect of
outstanding claims.
Every division prepares a claims statement.
To cover the possibility of errors in judgement in estimation or in cases of under-estimation of
liability (where full details are not available) as also for the possibility of liability not being
considered for claims incurred but not reported due to the nature of risks being such (e.g.,
where communication is made after a considerable time lag or after the cut-off date for
preparation of final accounts) the company at its head office makes an additional provision
over and above that made by Divisions/Branches on the Divisional Auditors’ Reports. Such
liability is presently being cushioned to the extent of 5.5% in respect of Fire, Marine and
Miscellaneous business (excluding motor, engineering, aviation, hull and credit guarantee)
and 10.5% for motor and engineering business.
In view of the above, total of outstanding claims comprises the estimated liability recorded at
the Divisions/Branches and the further provision made on this account at head office. This
provision is subject to the amount to be adjusted for re-insurances, which are dealt with at
head office.

2.3 Claims Paid

For each class of business, the insurance companies have to disclose, in the relevant revenue
accounts, claims paid separately. The divisional offices first ascertain the genuineness of the
claim and ensure completion of the necessary formalities to enable the settlement to be made.
Relevant evidence in respect of each claim is retained in each claim file and the liability is
discharged after obtaining sanction of the relevant authority on the basis of amounts involved.
The divisional offices are expected to submit to the Head Office, for re-insurance adjustments,
statements at regular intervals as to claims paid or provided for. Sometimes a year-end
statement is also prepared showing month-wise figures so communicated.
A liability for outstanding claims shall be brought to accounts in respect of both direct business
and inward reinsurance business.
The liability shall include:
(a) Future payments in relation to unpaid reported claims;
(b) Claims Incurred But Not Reported (IBNR) including inadequate reserves [sometimes
referred to as Claims Incurred But Not Enough Reported (IBNER)], which will result in future
cash/asset outgo for settling liabilities against those claims. Change in estimated liability
represents the difference between the estimated liability for outstanding claims at the
beginning and at the end of the financial period.
At the end of each financial year, as required by IRDA the actuarial valuation of the claims
liability of an insurer is made by the appointed actuary, and the shortfall, if any is provided as
IBNR/IBNER.

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 5.23 Advanced Accounting

2.4 Co-Insurance
In cases of large risks the business is shared between more than one insurer under co-
insurance arrangements at agreed percentages. The leading insurer issues the documents,
collects premium and settles claims. Statements of Account are rendered by the leading
insurer to the other co-insurers. Accounting for premium, claims etc. under co-insurance is
done in the same manner as that of the direct business except in respect of the following
peculiar features.
Incoming Co-insurance
(i) Premium - The co-insurer books the premium based on the statement received from the
leading insurer usually by issuing dummy documents. Entries are made in the Premium
Register from which the Premium Account is credited and the Leading Insurer
Company’s Account debited. In case the statement is not received, the premium is
accounted for on the basis of advices to ensure that all premium in respect of risk
assumed in any year is booked in the same year; share of premium relatable to further
extension/endorsements on policies by the leading insurer are also accounted for on the
basis of subsequent advices. Reference to the relevant communications should be made
from the concerned companies to ensure that premium collected by them and attributable
to the company is recorded.
(ii) Claims Provisions – Refer para 2.2.
(iii) Claims Paid - Normally, on the basis of claims paid, advices received from the leading
insurer, the Claims Paid Account is debited with a credit to the co-insurer. All such
advices are entered into the Claims Paid Register. It is a practice to treat all claims paid
advices relating to the accounting year received upto 31st January of the subsequent
year from leading insurer as claims paid.
Outgoing Co-insurance
The share of the insurer only for both premium and claims has to be accounted under
respective accounts. The share of other co-insurers is credited or debited, as the case may
be, to their personal accounts and not routed through revenue accounts.

2.5 Outstanding Premium

This should normally comprise amounts due for uncollected premium where the company is
allowed relaxation to the provisions of Section 64VB of the Insurance Act, 1938. The
outstanding balances are expected to be temporarily outstanding and should be recovered
within the stipulated period after the year-end. There may however be cases of premium
otherwise receivable and due but which remains uncollected at the year-end.
(a) Bank guarantee limits available - Premium in respect of risk accepted under Bank
Guarantee and Cash Deposit received either directly or through agents is accounted for
with reference to the limits available. Normally, monthly statements are prepared and

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.24

submitted to every party and the balances of outstanding premium are recovered before
the close of the following month. Outstanding premium in excess of bank guarantee
available should be reported.
(b) Cash Deposit - The balance of this account is always credit except in cases where the
premium due exceeds the cash deposits resulting in debit balance recoverable from the
party. Debit balance in the cash deposit account is shown separately since they are
classified separately with the debit balance under outstanding premium on the assets
side of the balance sheet.

2.6 Commission
Section 40A(3) of the Insurance Act, 1938, deals with and prescribes the basis and rates of
commission payable to agents. However, under the provisions of General Insurance
Nominalisation Act, the G.I.C. is empowered to regulate the commission structure.
It may be noted that all expenses of management are debited to a control account in the
general ledger under “Expenses of Management” with a supporting subsidiary ledger viz.,
“Analysis of Management Expenses” wherein expenses for each classified category are
posted and reconciled with the control account. Management Expenses Accounts
Classification Schedule is normally annexed to the Trial Balance and forms a part thereof.
Such expenses are shown separately under fire, marine and miscellaneous revenue accounts
apportioned as recommended by the Guidelines framed by the General Insurance Corporation
for this purpose, and as to the basis of such apportionment, a note is appended to the
accounts. Provision for outstanding expenses is made at the divisional office level.

2.7 Loans
Part II of the First Schedule to the Insurance Act, 1938, requires the following items to be
disclosed in the balance sheet:
Loans:
On mortgages of property within India.
On mortgages of property outside India.
On security of municipal and other public rates.
On stocks and shares.
On Insurer’s policies within their surrender value.
On personal security.
To Subsidiary Companies (other than Reversionary).
Reversions and Life Interests purchased.
Loans on Reversions and Life Interests.
Debentures and Debenture stocks of Subsidiary Reversionary Companies.

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 5.25 Advanced Accounting

Ordinary stocks and share of Subsidiary Reversionary Companies.

Loans to Subsidiary Reversionary Companies.
Besides the above items the present practice is also to disclose loans to industrial
undertakings in India on consortium basis with the GIC and the four subsidiary companies
and/or other financial institutions. Term loans may often be preceded by bridge loans to such
undertakings pending completion of all formalities.
Except for housing and other loans to staff which may be recorded at the Divisions/Regional
level other loans are usually dealt with at Head Office.

2.8 Investments
Investments in general insurance companies are governed by the provisions of Section 27B
of the Insurance Act, 1938 as well as by the guidelines issued from time to time by the Ministry
of Finance through General Insurance Corporation of India.
The various types of investments normally included in the Balance Sheet are given below:
1. Deposit with the Reserve Bank of India (Securities to be specified)
2. Indian Government Securities/State Government Securities
3. British, British Colonial and British Dominion Government Securities
4. Foreign Government Securities
5. Indian Municipal Securities
6. British and Colonial Securities/Foreign Securities
7. Bonds, Debentures, Stocks and other securities whereon Interest is guaranteed by the
Indian Government or State Government
8. Bonds, Debentures, Stocks and other Securities whereon Interest is guaranteed by the
British or any Colonial Government
9. Bonds, Debentures, Stocks and other Securities whereon Interest is guaranteed by any
Foreign Government
10. Debentures of any Railway in India
11. Debentures of any Railway out of India
12. Preference or guaranteed Shares of any Railway in India
13. Preference or guaranteed Shares of any Railway out of India
14. Railway Ordinary Stocks (i) in India (ii) out of India
15. Other Debentures and Debenture Stock of Companies incorporated (i) in India (ii) out of India
16. Other Guaranteed and Preference Stocks and Shares of Companies incorporated ( i) in
India (ii) out of India

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 Financial Statements of Insurance Companies 5.26

17. Other Ordinary Stocks and Shares of Companies incorporated (i) in India (ii) out of India
18. Holdings in Subsidiary Companies.
As per the Guidelines presently applicable, the investible funds have to be invested on the
following pattern (as per Insurance Regulatory & Development Authority (Investment) (fifth
amendment) Regulations, 2013:
No. Type of investment Percentage of
Investment Assets
(i) Central Government Securities Not less than 20%
(ii) Central Government Securities, State Government Securities Not less than 30%
and other approved securities (including (i) above)
(iii) Approved investments as specified in Section 27B of the Act and Not exceeding 70%
and Other Investment as specified in Section 27B(3) of the Act and
Schedule II to these Regulations, (all taken together) subject to
Exposure /Prudential Norms as specified in Regulation 9.
(iv) Other investments as specified under Section 27B (3) of the Act, Not more than 25%
subject to Exposure I Prudential Norms as specified in Regulation 9.
(v) Housing and loans to State Government for Housing and Fire Total Investment in
Fighting equipment, by way of subscription or purchase of housing (i.e.,)
investment in
A. Investments in Housing
categories (i), (ii), (iii)
a. Bonds / Debentures issued by HUDCO, National and (iv) above taken
Housing Bank together. shall not
b. Bonds/Debentures of Housing Finance Companies either be less than 5% of
duly accredited by National Housing Banks, for house the investment
building activities, or duly guaranteed by Government or Assets.
carrying current rating of not less than ‘AA' by a credit
rating agency registered under SEBI (Credit Rating
Agencies)Regulations,1999 .
c. Asset Backed Securities with underlying Housing loans,
satisfying the norms specified in the Guidelines issued
under these regulations from time to time. I
B. Investment in Infrastructure
(Explanation: Subscription or purchase of Bonds Debentures, Equity Total investment in
and Asset Backed Securities with underlying infrastructure assets Infrastructure (i.e.,)
would qualify for the purpose of this requirement. investment in
categories
'Infrastructure facility' shall have the meaning as given in clause (h) (i), (ii),(iii) and (iv)
of regulation 2 of Insurance Regulatory and Development Authority above taken together

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 5.27 Advanced Accounting

(Registration of Indian Insurance Companies) (Amendment) shall not be less than

Regulations. 2008 as amended from time to time. 10% of the
Investment Assets
Note: Investments made under category (i) and (ii) above may be
considered as investment in housing or infrastructure, as the case
may be. provided the respective government issues such a security
specifically to meet the needs of any of the sectors specified as
'infrastructure facility'
On the basis of estimates made at the beginning of the year, the investments are made
accordingly in each category. The estimates are reviewed and revised periodically if
necessary.
The following books and records are normally maintained in the Investment Department of the
Head Office of a company carrying on general insurance business.
(1) Contracts (Bought/Sold Notes)
(2) Copies of the Delivery Instructions
(3) Purchase Registers
(4) Application Money Registers
(5) Allotment and Call Money Registers
(6) Rights Issue/Bonus Issue Registers
(7) Sales Redemption Registers
(8) Term Loans Registers
(9) Fixed Deposits/Participation Certificates/Bills Register
(10) Underwriting Registers
(11) Dividend Reconciliation Register
(12) Interest Reconciliation Register
(13) Safe-custody Receipts issued by banks
(14) Cash Book/Bank Book
(15) Investments sub-ledgers
(16) General Ledgers
(17) Investment Schedules, classified as to nature of investments.

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 Financial Statements of Insurance Companies 5.28

2.9 Unexpired Risks Reserve

Insurance Company, close their accounts on 31st March but not all risks under different
policies expire on that date. Many policies extend into the following accounting year during
which the risk continues. Therefore on the closing date there is an unexpired liability under
various policies which may occur during the remaining term of the policy beyond the year and
therefore, a provision for unexpired risks is made. This reserve is based on the Net Premium
income earned by the insurance company during the year.
The effort involved in calculating unexpired portion of premium under each policy is very time
consuming. Therefore, a simple formula to derive a percentage of premium income to be
allocated to reserve for unexpired risks is adopted.
According to the requirements of the Insurance Act, it is sufficient if the provision is made for
unexpired risks at 50 per cent for Fire, Marine Cargo and Miscellaneous business except for
Marine Hull which has to be 100 per cent. It may be mentioned that the insurance companies
are governed by the provisions of Section 44 of the Income-tax Act, 1961. In this regard, Rule
5 of the First Schedule to the Income-tax Rules — computation of Profit & Loss of General
Insurance Business — provides for creation of a reserve for unexpired risks as prescribed
under Rule 6E of the said Rules. According to this Rule, the insurance companies are allowed
a deduction of 50 per cent of net premium income in respect of Fire and Miscellaneous
Business and 100 per cent of the net premium income relating to Marine Insurance business.
In view of this the reserves are created at the rates allowed under the Income-tax Act.
Additional reserve for unexpired risk
• In a particular year the management may feel that the percentage of premium
recommended by the General Insurance Council is not sufficient to meet the unexpired
risks. In such a situation they may provide additional reserve. Such additional reserve for
unexpired risk will also be debited to the revenue account.
• The balance will be shown in the balance sheet as in the case of normal reserve for
unexpired risk, and will be transferred to the credit of next year’s revenue account.
Illustration 1
Indian Insurance Co. Ltd. furnishes you with the following information :
(i) On 31.12.2011 it had reserve for unexpired risk to the tune of ` 40 crores. It comprised of
` 15 crores in respect of marine insurance business : ` 20 crores in respect of fire
insurance business and ` 5 crores in respect of miscellaneous insurance business.
(ii) It is the practice of Indian Insurance Co. Ltd. to create reserves at 100% of net premium
income in respect of marine insurance policies and at 50% of net premium income in
respect of fire and miscellaneous income policies.

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 5.29 Advanced Accounting

(iii) During 2012, the following business was conducted :

Marine Fire Miscellaneous
(` in crores)
Premia collected from :
(a) Insureds in respect of
policies issued 18 43 12
(b) Other insurance companies
in respect of risks undertaken 7 5 4
Premia paid/payable to other insurance
companies on business ceded 6.7 4.3 7
Indian Insurance Co. Ltd. asks you to :
(a) Pass journal entries relating to “Unexpired risks reserve”.
(b) Show in columnar form “Unexpired risks reserve” a/c for 2012.
Solution
(a) Journal of Indian Insurance Co. Ltd.
(` in crores)
2012 Dr. Cr.
Dec. 31 Marine Revenue A/c Dr. 3.30
To Unexpired Risks Reserve A/c 3.30
(Being the difference between closing provision of
` 18.30 crores (18 + 7 – 6.7) and opening provision
of ` 15 crores charged to marine revenue account)
Fire Revenue A/c Dr. 1.85
To Unexpired Risks Reserve A/c 1.85
(Being the difference between closing provision of
` 21.85 crores [(43 + 5 – 4.3)/2] and opening provision
of ` 20 crores charged to fire revenue account)
Unexpired Risks Reserve A/c Dr. 0.50
To Miscellaneous Revenue A/c 0.50
(Being the excess of opening balance of ` 5 crores
over the required closing balance of ` 4.5 crores
[(12 + 4 – 7)/2] credited to miscellaneous revenue
account).

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 Financial Statements of Insurance Companies 5.30

(b) Unexpired Risks Reserve A/c

(` in crores)
Marine Fire Miscel- Marine Fire Miscel-
laneous laneous
2012 ` ` ` 2012 ` ` `
Dec. 31 To Revenue – 0.5 Jan 1 By Balance 15.00 20.00 5.00
A/c b/d
To Balance Dec. By Revenue
c/d 31 A/c
18.30 21.85 4.50 3.30 1.85 –
18.30 21.85 5.00 18.30 21.85 5.00

Note : Alternatively, the opening balances of unexpired risk reserves may be reversed in the
beginning of year by transfer to Revenue account and fresh reserve of full required amount
may be created at the end of the year which will be carried forward as closing balances.

2.10 Re-Insurance
In general insurance there are risks which, because of their magnitude or nature, one
insurance company cannot afford to cover, e.g., aviation insurance. Generally, in such cases,
an insurance company insures the whole risk itself and lays off the amount it has accepted to
other insurance of reinsurance companies, retaining only that much risks which it can absorb.
A reinsurance transaction may thus be defined as an agreement between a ‘ceding company’
and a ‘re-insurer’ whereby the former agrees to ‘cede’ and the latter agrees to accept a certain
specified share of risk or liability upon terms as set out in the agreement.
A ‘ceding company’ is the original insurance company which has accepted the risk and has
agreed to ‘cede’ or pass on that risk to another insurance company or a reinsurance company.
It may however be emphasized that the original insured does not acquire any right under a
reinsurance contact. In the event of loss, therefore, the insured’s claim for full amount is
against the original insurer.
In other words, if an insurer is not willing to bear the whole of the risk, it reinsures itself. Some
risk retains with some other insurer. This is called as reinsurance. Both re-insurer and original
insurer share the premium and risk in the same proportion and decided by them earlier.
The accounting entries pertaining to re-insurance business ceded to and by an insurance
company may be explained with the help of an example:
(X insurance company cedes re-insurance business to Y insurance company and Z insurance
company cedes re-insurance business to X insurance company.) Accounting entries pertaining
to re-insurance business ceded to and by X insurance company in the above example may be
given as follows:

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 5.31 Advanced Accounting

In the books of X Insurance Company

X Insurance company cedes reinsurance business to Y:-
1. Re--Insurance Premium (on reinsurance ceded) A/c Dr. xxxx
To Y Insurance Co xxxx
(Being premium on reinsurance business ceded to Y Insurance Co recorded)
2. Y Insurance Co A/c Dr. xxxx
To Commission (on Reinsurance ceded) xxxx
(Being commission due on re-insurance business ceded to Y Insurance Co recorded)
3. Y Insurance Co A/c Dr. xxxx
To Claims (on reinsurance ceded) xxxx
(Being claims receivable from Y Co. for part of insurance business ceded)
Z Insurance company cedes reinsurance business to X:-
1. Z Insurance Co A/c Dr. xxxx
To Re-Insurance premium (on reinsurance accepted) xxxx
(Being premium on business ceded by Z insurance company recorded)
2. Commission (on Reinsurance ceded) Dr. xxxx
To Z Insurance Co xxxx
(Being commission due on re-insurance business ceded to Z company debited)
3. Claims (on reinsurance accepted) A/c Dr. xxxx
To Z Insurance Co xxxx
(Being claims on re-insurance business accepted from Z company recorded)

Illustration 1
Janani Assurance Co. Ltd. received ` 5,90,000 as premium on new policies and ` 1,20,000 as
renewal premium. The company received ` 90,000 towards reinsurance accepted and paid
` 70,000 towards reinsurance ceded. How much will be credited to Revenue Account towards
premium?
`
Premium received in respect of new policies 5,90,000
Add: Renewal premium 1,20,000
7,10,000
Add: Re-insurance premium accepted 90,000
8,00,000
Less: Re-insurance ceded (70,000)
Premium amount to be credited to Revenue A/c 7,30,000

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 Financial Statements of Insurance Companies 5.32

Broadly speaking, there are two types of reinsurance contracts:

1. Facultative Reinsurance : It is that type of reinsurance whereby the contract relates to one
particular risk and is expressed in a reinsurance policy.. Each transaction under Facultative
Reinsurance has to be negotiated individually and each party to the transaction has a free choice,
i.e. for the ceding company to offer and the reinsurer to accept. The main drawback of this type of
insurance is the volume of work involved and time taken to cover the risk.
2. Treaty Insurance: Under this type of reinsurance a Treaty agreement is entered into between
ceding company and the re-insurer(s) whereby the reinsurances are within the limits of the Treaty.
These limits can be monetary, geographical, section of business, etc. Under this contract it is obligatory
for the re-insurer to accept all risks within the scope of this Treaty and it is obligatory for the ceding
company to cede risks in accordance with the terms of the Treaty.
Treaties can also be divided into two categories, viz. proportional treaties and non-proportional treaties.
Direct
Re-insurance business Accepted Re-insurance business ceded

Insurance Company

Summary
• Commission on Reinsurance Accepted: The reinsurer generally allows commission to
reinsured on apart of business ceded. This is treated as expense of the company.
• Commission on Reinsurance ceded: Reinsurance generally gets commission for giving
the business under reinsurance contract. It appears as an income in revenue account.
• Coinsurance: when a large risk is offered to an insurance company, then that insurance
company retains certain percentage of sum insured and contracts other insurance
company to underwriter the balance of risk. In this way, all the companies jointly bear the
risk. One is called as the leader who issues the policy and acts on behalf of others.
• Reserve for unexpired Risk:
For Marine Business = 100% of net premium income
For others = 50% of net premium income

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 5.33 Advanced Accounting

Unit – 3 : Financial Statements of Insurance Companies

Learning Objectives
After studying this unit, you will be able to:
♦ Prepare financial statements of insurance companies carrying on life insurance
business.
♦ Prepare financial statements of insurance companies carrying on general insurance
♦ Understand the requirements of IRDA Regulations, 2002.

3.1 Introduction
Insurance Regulatory and Development Authority, after consultation with the Insurance
Advisory Committee, in exercise of the powers conferred by section 114A of the Insurance
Act, 1938 (4 of 1938) published the Insurance Regulatory and Development Authority
(Preparation of Financial Statements and Auditor's Report of Insurance Companies)
Regulations 2000 in the official Gazettee on 14th August, 2000. Recently that Guidelines are
revised and a new set of guidelines have been issued vide notification dated 30th March, 2002
[[Link]]. As per the IRDA Guidelines, an insurer carrying on life insurance
business shall comply with the requirements given in Schedule A, an insurer carrying on
general insurance business shall comply with the requirements given in Schedule B and the
report of the auditors shall be in conformity with the requirements of Schedule C.

3.2 Structure of Schedules A and B

The following table depicts the structure of schedules A and B given under IRDA regulations:
Schedule A for Life Insurance Business Schedule B for General Insurance
Business
Part I: Accounting Principles for preparation Part I: Accounting Principles for preparation
of financial statement of financial statements
Part II: Disclosures forming part of Financial Part II: Disclosures forming part of Financial
Statements Statement
Part III: General Instructions for preparation Part III: General Instructions for preparation
of financial statements of financial statements.
Part IV: Contents of Management Report Part IV: Contents of Management Report
Part V: Preparation of Financial statements Part V: Preparation of financial statements.
Form A-RA: Revenue Account Form B-RA: Revenue Account
Form A-PL: Profit and Loss Account Form B-PL: Profit and Loss Account
Form A-BS: Balance sheet and 15 Schedules Form B-BS: Balance Sheet and 15 Schedules
forming part of financial forming part of financial
statements statements

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 Financial Statements of Insurance Companies 5.34

3.3 Financial Statements

Life Insurance Business
The insurance company carrying life insurance business is required to prepare Balance sheet
Form A – BS, Revenue account [Policy holders’ account] Form A- RA, Profit and loss account
Form A-PL. These forms have been given in the IRDA Regulations, 2002.
No form has been specified for cash flow statement.
General Insurance Business
The insurance company carrying on general insurance business is required to prepare
Balance Sheet Form B – BS, Revenue account [Policy holders’ account] Form B- RA, Profit
and loss account Form B-PL. These forms have been given in the IRDA Regulations, 2002.
No form has been specified for cash flow statement.

3.4 IRDA Regulations, 2002

Some of the contents of the IRDA Regulations, 2002 have been given below:
1. Preparation of financial statements, management report and auditor’s report
(1) An insurer carrying on life insurance business, after the commencement of these
Regulations, shall comply with the requirements of Schedule A.
(2) An insurer carrying on general insurance business, after the commencement of these
Regulations, shall comply with the requirements of Schedule B:
Provided that this sub-regulation shall apply, mutatis mutandis, to reinsurers until separate
regulations are made for them.
(3) The report of the auditors on the financial statements of every insurer and reinsurer shall
be in conformity with the requirements of Schedule C, or as near thereto as the circumstances
permit.
Note: For details regarding Schedule A and Schedule B refer Annexure I and Annexure
II respectively, given at the end of this Chapter.
SCHEDULE C (See Regulation 3): AUDITOR’S REPORT
The auditors shall express their opinion on
• whether the balance sheet gives a true and fair view of the insurer’s affairs as at the end
of the financial year/period;
• whether the revenue account gives a true and fair view of the surplus or the deficit for the
financial year/period;
• whether the profit and loss account gives a true and fair view of the profit or loss for the
financial year/period; and

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 5.35 Advanced Accounting

• whether the receipts and payments account gives a true and fair view of the receipts and
payments for the financial year/period.
The auditor should also comply with other provisions stated in the IRDA (Preparation of
Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002.

3.5 Preparation of Financial Statements

After studying IRDA Regulations, let us work out few illustrations which will help you in
understanding the procedure for preparation of financial statements of insurance companies.
Students are required to go through the formats of Revenue Account, Profit and Loss Account,
Balance Sheet and its Schedules as prescribed in Part V of Schedule A for Life Insurance
business given in Annexure I for better understanding of the illustration given here under.
Illustration 1
From the following balance as at 31st March, 2012 in the books on the National Life
Assurance Co. Ltd., prepare Profit and Loss Account and Balance Sheet.
` ‘000 ` ‘000
Life Assurance Fund on 1st Agents’ Balances (Dr.) 18,000
April, 2011 34,00,000 Advances to ceding companies 47,000
Annuities paid (in India 72,500) 81,750 Due from Re-insurers 38,500
General Reserve 2,25,000 Due to Re-insurers 47,500
Deposit with the Reserve Bank Sundry Creditors 1,800
—Government Securities 2,10,000 Premiums : First year 5,90,000
Indian Government Securities 10,90,000 Renewal 1,20,000
Foreign Government Securities 75,000 Reinsurance accepted 50,000
Loan on Company’s Policies 2,10,000 Reinsurance ceded 70,000
Leasehold Buildings 63,300 Interim Bonus to Policy-holders 22,500
Securities on which interest is Commission –
guaranteed by the Government 4,50,000 Direct : First year 40,500
Stocks of Shares of companies Renewal 2,000
incorporated in India 14,50,000 Reinsurance accepted 12,000
Share Capital (20,000 shares @ 20,00,000 Reinsurance ceded 4,000
` 100 each) Claims
Mortgages in India 14,32,500 By Death (in India 1,30,000) 2,00,000
Cash with Bankers on By Maturity (in India 1,40,000) 2,20,000
Current Account 40,500 Bank Loan 21,750
Cash with Bankers on Salaries 30,400
Deposit (short-term) Account 20,000 Auditors’ Fees 5,400
Cash in hand 7,000 Law Charges 3,400

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 Financial Statements of Insurance Companies 5.36

State Government Securities 7,25,000 Rent paid 3,600

Furniture and Fixtures 39,000 Other Expenses of Management 750
Outstanding Premiums 66,000 Travelling Expenses 1,950
Interest and Rents
Received (Gross) 2,16,000
Transfer the surplus amount if any to Life Fund for the year ended 31st March, 2012. 5%
dividend is also proposed on share capital.
Solution
In the books of National Assurance Co. Ltd.
Revenue Account for the year ended 31st March, 2012
Policyholders’ Account (Technical Account)
Particulars Schedule Current Previous
Year Year
(` ’000) (` ’000) (` ’000)
Premiums earned – net
(a) Premium 1 7,10,000
(b) Reinsurance ceded (70,000)
(c) Reinsurance accepted 50,000 6,90,000
Income from Investments
(a) Interest, Dividends & Rent – Gross 2,16,000
(b) Profit on sale redemption of
investments
(c) (Loss on sale/redemption of
investments)
(d) Transfer/Gain on revaluation change in
fair value*
Other Income (to be specified)
Total (A) 9,06,000
Commission 2 50,500
Operating Expenses related to Insurance 3 45,500
Business
Other Expenses (to be specified) —
Provisions (other than taxation)
(a) For diminution in the value of
investments (Net)
(b) Others (to be specified)
Total (B) 96,000
Benefits Paid (Net) 4 5,01,750

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 5.37 Advanced Accounting

Interim Bonuses Paid 22,500

Change in valuation of liability against life
policies in force
(a) Gross**
(b) (Amount ceded in Reinsurance)
(c) Amount accepted in Reinsurance
Total (C) 5,24,250
Surplus [(A) – (B) – (C)] 2,85,750
Appropriations
Transfer to Shareholders’ Account 2,85,750
Transfer to Other Reserves (to be -
specified)
Transfer to Funds for Future Appropriations -
Total (D) 2,85,750
Form A-PL
Profit & Loss Account for the year ended 31st March, 2012
Shareholders’ Account (Non-technical Account)
Particulars Schedule Current Previous
Year Year
(` ’000) (` ’000)
Balance brought forward from/transferred to the
Policyholders
Account (Technical Account) 2,85,750
Income From Investments
(a) Interest, Dividends & Rent – Gross
(b) Profit on sale/redemption of investments
(c) (Loss on sale/redemption on investments)
Other Income (To be specified)
Total (A)
Expense other than those directly related to the
insurance business
Provisions (Other than taxation)
(a) For diminution in the value of investments
(Net)
(b) Other (to be specified)
Total (B)
Profit/(Loss) before tax
Provision for Taxation

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.38

Profit/(Loss) after tax

Appropriations
(a) Brought forward Reserve Surplus from the
Balance Sheet
(b) Interim dividends paid during the year
(c) Proposed final dividend 1,00,000
(d) Dividend distribution on tax
(e) Transfer to reserves/other accounts (to be
specified)
Profit carried forward to the Balance Sheet 1,85,750
Notes :
(a) In case of premiums, less reinsurance in respect of any segment of insurance business
of total Premium earned, the same shall be disclosed separately.
(b) Premium income received from business concluded in and outside India shall be
separately disclosed.
(c) Reinsurance premiums whether on business ceded or accepted are to be brought into
account gross (i.e., before deducting commissions) under the head reinsurance premiums.
(d) Claims incurred shall comprise claims paid, settlement costs wherever applicable and
change in the outstanding provision for claims at the year-end.
(e) Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or ` 5,00,000 whichever is higher, shall be shown as a separate line item.
(f) Fees and expenses connected with claims shall be included in claims.
(g) Under the sub-head “Others” shall be included items like foreign exchange gains or
losses and other items.
(h) Interest, dividends and rentals receivable in connection with the investment should be
stated as gross amount, the amount of income tax deducted at source being included
under advance taxes paid and taxes deducted at source.”
(i) Income from rent shall include only the realised rent. It shall not include any notional rent.
st
Balance Sheet as at 31 March, 2012
Shareholders’ Account (Non-technical Account)
Schedule Current Previous
Year Year
(` ’000) (` ’000)
Sources of Funds
Shareholders’ Funds
Share Capital 5 20,00,000
Reserves and Surplus 6 38,10,750
Credit/[Debit] Fair value change account

© The Institute of Chartered Accountants of India

 5.39 Advanced Accounting

Sub-Total
Borrowings 7 69,250
Policyholders’ Funds
Credit/[Debit] Fair value change account
Policy Liabilities
Insurance reserves
Provision for linked liabilities
Sub-Total
Funds for future appropriations
Total 58,80,000
Application of Funds
Investments 8 40,00,000
Shareholders’
Policyholders’
Assets held to cover linked liabilities
Loans 9 16,42,500
Fixed Assets 10 1,02,300
Current Assets
Cash and Bank Balances 11 67,500
Advances and Other Assets 12 1,69,500
Sub-Total (A) 2,37,000
Current Liabilities 13 1,800
Provisions 14 1,00,000
Sub-Total (B) 1,01,800
Net Current Assets (C) = (A – B) 1,35,200
Miscellaneous expenditure —
(to the extent not written off or adjusted)
Debit Balance in profit & Loss Account
(Shareholders’ Account)
Total [Sch.8,9,10 & (C)] 58,80,000

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.40

SCHEDULES FORMING PART OF FINANCIAL STATEMENTS

SCHEDULE–1: PREMIUM
Particulars Current Previous
Year Year
(` ’000) (` ’000)
1. First year premiums 5,90,000
2. Renewal premiums 1,20,000
3. Single premiums
Total premiums 7,10,000
Premiums Income from business written :
1. In India
2. Outside India
Total premiums (Net)
SCHEDULE–2: COMMISSION EXPENSES

Particulars Current Year Previous Year

(` ’000) (` ’000)
Commission paid
Direct – First year premium 40,500
– Renewal premiums 2,000
– Single premiums
Add : Commission on Re-insurance Accepted 12,000
Less : Commission on Re-insurance Ceded (4,000)
Net Commission 50,500
Notes :
The profit/commission, if any, are to be combined with the Re-insurance accepted or Re-
insurance ceded figures.
SCHEDULE–3: OPERATING EXPENSES RELATED TO INSURANCE BUSINESS
Particulars Current Previous
Year Year
(` ’000) (` ’000)
1. Employees’ remuneration & welfare benefits 30,400
2. Travel, conveyance and vehicle running expenses 1,950
3. Rents, rates & taxes 3,600
4. Repairs
5. Printing & stationery
6. Communication expenses

© The Institute of Chartered Accountants of India

 5.41 Advanced Accounting

7. Legal & professional charges 3,400

8. Medical fees
9. Auditors’ fees, expenses etc. 5,400
(a) as auditor
(b) as adviser or in any other capacity, in respect of
(i) Taxation matters
(ii) Insurance matters
(iii) Managements services, and
(c) in any other capacity
10. Advertisement and publicity
11. Interest & Bank Charges
12. Others (to be specified) 750
13. Depreciation
Total 45,500
SCHEDULE–4: BENEFITS PAID [NET]
Particulars Current Previous
Year Year
(` ’000) (` ’000)
1. Insurance Claims
(a) Claims by Death, 2,00,000
(b) Claims by Maturity, 2,20,000
(c) Annuities/Pensions in payment, 81,750
(d) Other benefits, specify
2. (Amount ceded in reinsurance) :
(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities/Pensions in payment,
(d) Other benefits, specify
3. Amount accepted in reinsurance :
(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities/Pensions in payment,
(d) Other benefits, specify
Total 5,01,750
Benefits paid to claimants :
1. In India (72,500 + 1,30,000 + 1,40,000) 3,42,500
2. Outside India 1,59,250
Total Benefits paid (Net) 5,01,750

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.42

SCHEDULE–5: SHARE CAPITAL

Particulars Current Previous
Year Year
(` ’000) (` ’000)
1. Authorised Capital
Equity Shares of ` ...... each
2. Issued Capital
Equity Shares of ` ...... each
3. Subscribed Capital
Equity Shares of ` ...... each 20,00,000
4. Called-up Capital
Equity Shares of ` ...... each
5. Less : Calls unpaid
Add : Share forfeited (Amount Originally paid up)
Less : Par value of Equity Shares bought back
Less : Preliminary Expenses
Expenses including commission or brokerage on
Underwriting or subscription of shares
Total 20,00,000
Notes :
(a) Particulars of the different classes of capital should be separated stated.
(b) The amount capitalised on account of issue of bonus shares should be disclosed.
(c) In case any part of the capital is held by a holding company, the same should be
separately disclosed.
SCHEDULE–5A: PATTERN OF SHAREHOLDING
[As certified by the Management]
Particulars Current Year Previous Year
Number of % of Number of % of
Shares Holding Shares Holding
Promoters
• Indian
• Foreign
Others
Total
SCHEDULE–6: RESERVES AND SURPLUS
Particulars Current Previous
Year Year
(` ’000) (` ’000)
1. Capital Reserve

© The Institute of Chartered Accountants of India

 5.43 Advanced Accounting

2. Capital Redemption Reserve

3. Share Premium
4. Revaluation Reserve
5. General Reserves 2,25,000
Less : Debit balance in Profit and Loss Account, if any
Less Amount utilized for Buy-back
6. Catastrophe Reserve
7. Other Reserves (to be specified) Life Fund
Opening balance 34,00,000
Transfer during the year 1,87,750 35,85,750
8. Balance of profit in Profit and Loss Account
Total 38,10,750
Notes :
Additions to and deductions from the reserves should be disclosed under each of the specified heads.
SCHEDULE–7: BORROWINGS
Particulars Current Previous
Year Year
(` ’000) (` ’000)
1. Debentures/Bonds
2. Fixed Deposits
3. Banks 21,750
4. Financial Institutions
5. Other entities carrying on insurance business 47,500
Total 69,250
Notes :
(a) The extent to which the borrowings are secured shall be separately disclosed stating the
nature of the security under each sub-head.
(b) Amounts due within 12 months from the date of Balance Sheet should be shown
separately.
The classification of investments as desired by schedule 8 and 8A of the format can’t be done
due to non-availability, of formation of shareholders’ and policyholders’ investments.
Therefore, investments are shown as follows (included as total figure in the Balance Sheet)

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.44

SCHEDULE–8: INVESTMENTS
Particulars Current Previous
Year Year
(` ’000) (` ’000)
Deposit with the RBI 2,10,000
Indian Government Securities 10,90,000
State Government Securities 7,25,000
Foreign Government Securities 75,000
Securities guaranteed by the Government 4,50,000
Stock and shares of companies incorporated in India 14,50,000
40,00,000
SCHEDULE–9: LOANS
Particulars Current Previous
Year Year
(` ’000) (` ’000)
1. Security-wise classification
Secured
(a) On mortgage of property
(aa) In India 14,32,500
(bb) Outside India
(b) On shares, Bonds, Govt. Securities, etc.
(c) Others (to be specified)
Unsecured
(a) Loans against policies 2,10,000
(b) Others (to be specified)
Total 16,42,500
2. Borrower-wise classification
(a) Central and State Governments
(b) Banks and Financial Institutions
(c) Subsidiaries
(d) Companies
(e) Loans against policies
(f) Others (to be specified)
Total
3. Performance-wise classification
(a) Loans classified as standard
(aa) In India
(bb) Outside India
Non-standard loans less provisions
(aa) In India
(bb) Outside India
Total

© The Institute of Chartered Accountants of India

 5.45 Advanced Accounting

4. Maturity-wise classification
(a) Short Term
(b) Long Term
Total
Notes :
(a) Short-term loans shall include those, which are repayable within 12 months from the date
of balance sheet. Long term loans shall be the loans other than short-term loans.
(b) Provisions against non-performing loans shall be shown separately.
(c) The nature of the security in case of all long term secured loans shall be specified in
each case. Secured loans for the purposes of his schedule, means loans secured wholly
or partly against on asset of the company.
(d) Loans considered doubtful and the amount of provision created against such loans shall
be disclosed.

SCHEDULE–10: FIXED ASSETS

(` ’000)
Particulars Cost/Gross Depreciation Net Block
Block
Goodwill
Intangibles (specify)
Land-Freehold
Leasehold Property 63,300
Buildings
Furniture & Fittings 39,000
Information Technology
Equipment
Vehicles
Office Equipment
Others (Specify nature)
Total 1,02,300
Notes :Assets included in land, property and building above exclude Investment Properties as
defined in note (e) to Schedule 8.
SCHEDULE–11: CASH AND BANK BALANCES
Particulars Current Previous
Year Year
(` ’000) (` ’000)
1. Cash (including cheques, drafts and stamps) 7,000
2. Bank Balances
(a) Deposit Accounts
(aa) Short-term (due within 12 months of the

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.46

date of Balance Sheet) 20,000

(bb) Others
(b) Current Accounts 40,500
(c) Others (to be specified)
3. Money at Call and Short Notice
(a) With Banks
(b) With other Institutions
4. Others (to be specified)
Total 67,500
Balances with non-scheduled banks included in 2 and 3 above
SCHEDULE – 12

ADVANCES AND OTHER ASSETS

Particulars Current Year Previous

Year
(` ’000) (` ’000)
ADVANCES
1. Reserve deposits with ceding companies 47,000
2. Application money for investments
3. Prepayments
4. Advances to Directors/Officers
5. Advance tax paid and taxes deducted at source (Net of
provision for taxation)
6. Others (to be specified)
TOTAL (A) 47,000
OTHER ASSETS
1. Income accrued on investments
2. Outstanding Premiums 66,000
3. Agents’ Balances 18,000
4. Foreign Agencies Balances
5. Due from other entities carrying on insurance business 38,500
(including reinsures)
6. Due from subsidiaries/ holding
7. Deposit with Reserve Bank of India
[Pursuant to section 7 of Insurance Act, 1938]
8. Others (to be specified)
TOTAL (B) 1,22,500
TOTAL (A+B) 1,69,500

© The Institute of Chartered Accountants of India

 5.47 Advanced Accounting

SCHEDULE – 13
CURRENT LIABILITIES

Particulars Current Year Previous Year

(` ’000) (` ’000)
1. Agents’ Balances
2. Balances due to other insurance companies
3. Deposits held on re-insurance ceded
4. Premiums received in advance
5. Unallocated Premium
6. Sundry creditors 1,800
7. Due to subsidiaries/ holding company
8. Claims Outstanding
9. Due to Officers/ Directors
10. Others (to be specified)
TOTAL 1,800
SCHEDULE – 14
PROVISIONS

Particulars Current Year Previous

Year
(` ’000) (` ’000)
1 Reserve for Unexpired Risk
2 For taxation (less advance tax paid and taxes deducted at
source)
3 For proposed dividends 1,00,000
4 For dividend distribution tax
5 Others (to be specified)
TOTAL 1,00,000

Students are required to go through the formats of Revenue Account, Profit and Loss
Account, Balance Sheet and its Schedules as prescribed in Part V of Schedule B for
General Insurance business given in Annexure II for better understanding of the
illustrations 2 to 4 given here under.
Illustration 2
Prepare Revenue Account in proper form for the year ended 31st March, 2012, from the
following particulars related to Goma General Insurance Co. for the year 2011 – 2012:

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.48

Related to Direct Related to

business Reinsurance business
(` ) (` )
Premiums:
Amount received 30,00,000 2,40,000
Receivable at the beginning 1,80,000 24,000
Receivable at the end 2,40,000 36,000
Amount paid -- 3,60,000
Payable at the beginning -- 30,000
Payable at the end -- 42,000
Claims:
Amount paid 18,00,000 1,80,000
Payable at the beginning 60,000 12,000
Payable at the end 1,20,000 18,000
Amount recovered _ 1,20,000
Receivable at the beginning _ 18,000
Receivable at the end _ 12,000
Commission:
Amount paid 72,000 10,800
Amount received -- 14,400
Additional information:
(i) Interest, dividend and rent received 30,000
Income-tax in respect of above 6,000
(ii) Management expenses including ` 12,000 related to legal
expenses regarding claims 1,32,000
Provision for income tax existing at the beginning of the year was ` 1,95,000, the income-tax
actually paid during the year ` 1,68,000 and the provision necessary at the year end
` 2,07,000.
The net premium income of the company during the year 2010 – 2011 was ` 24,00,000 on
which reserve for unexpired risk @ 50% and additional reserve @ 7 ½ % was created. This
year, the balance to be carried forward is 50% of net premium on reserve for unexpired risk
and 5% on additional reserve.

© The Institute of Chartered Accountants of India

 5.49 Advanced Accounting

Solution
FORM B – RA
Name of the Insurer : Goma General Insurance Company
Registration no. and date of registration with IRDA : ………………..
Revenue Account for the year ended 31.3.2012
Particulars Schedule Amount (` )
1. Premium earned (Net) 1 27,03,000
2. Profit/Loss on sales/Redemption of investment - -
3. Other - -
4. Interest, dividend & rent (Gross) - 30,000
Total (A) 27,33,000
1. Claims incurred (Net) 2 19,44,000
2. Commission 3 68,400
3. Operating expenses related to insurance business 4 1,20,000
Total (B) 21,32,400
Operating profit/Loss from insurance business
(C) = (A-B) 6,00,600
Appropriation:
Transfer to Shareholders account -

Transfer to Catastrophe Reserve -

Transfer to other reserves -
Total (D) -
Schedule – 1 Premium Earned (Net)
Particulars `
Premium received from direct business (W.N.1) 30,60,000
Add: Premium on reinsurance accepted ` (2,40,000 + 36,000 – 24,000) 2,52,000
33,12,000
Less: Premium on reinsurance ceded ` (3,60,000 + 42,000 – 30,000) (3,72,000)
Net Premium 29,40,000
Adjustment for change in reserve for unexpired risk (W.N.2) (2,37,000)
Total premium earned (Net) 27,03,000

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.50

Schedule – 2 Claims Incurred (Net)

Particulars `
Claims paid (Direct) 18,00,000
Add: Legal expenses regarding claims 12,000
18,12,000
Add: Reinsurance Accepted 1,80,000
19,92,000
Less: Reinsurance ceded ` (1,20,000 + 12,000 –18,000) (1,14,000)
18,78,000
Add: Claims outstanding at the end ` (1,20,000 + 18,000) 1,38,000
Less: Claims outstanding at the beginning ` (60,000 + 12,000) (72,000)
Total claim incurred 19,44,000
Schedule –3 Commission
Particulars `
Commission paid Direct
72,000
Add: Re-insurance accepted 10,800
82,800
Less: Re-insurance ceded (14,400)
Net commission 68,400
Schedule – 4 Operating Expenses related to Insurance Business
Particulars `
Expenses of management ` (1,32,000 – 12,000) 1,20,000
Working Notes:
1. Calculation of premium received from direct business
Premium on direct business 30,00,000
Add: Premium outstanding at the end 2,40,000
32,40,000
Less: Premium outstanding at the beginning (1,80,000)
30,60,000

© The Institute of Chartered Accountants of India

 5.51 Advanced Accounting

2. Computation of change in reserve for unexpired risk

`
Reserve for unexpired risk for the year 2011-12 (29,40,000 x 50%) 14,70,000
Add: Additional reserve for unexpired risk for the year 2011-12
(29,40,000 x 5%) 1,47,000
16,17,000
Less: Reserve for unexpired risk for the year 2010-11
(24,00,000 x 50%) (12,00,000)
Additional reserve for unexpired risk for the year
(24,00,000 x 7.5%) (1,80,000)
2,37,000
Illustration 3

The following are the Balances of Hercules Insurance Co. Ltd. as on 31st March, 2013 :
(` in ’000)
Capital 320,00
Balances of Funds as on 1.4.2012
Fire Insurance 800,00
Marine Insurance 950,00
Miscellaneous Insurance 218,65
Unclaimed Dividends 8,50
Amount Due to Other Insurance Companies 34,50
Sundry Creditors 72,50
Deposit and Suspense Account (Cr.) 22,80
Profit and Loss Account (Cr.) 80,40
Agents Balances (Dr.) 135,00
Interest accrued but not due (Dr.) 22,50
Due from other Insurance Companies 64,50
Cash in Hand 3,50
Balance in Current Account with Bank 74,80
Furniture and Fixtures WDV (cost 100,00) 58,00
Stationery Stock 1,40
Expenses of Management
Fire Insurance 280,00

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.52

Marine Insurance 160,00

Miscellaneous Insurance 40,00
Others 30,00 510,00
Foreign Taxes—Marine 8,00
Outstanding premium 82,00
Donation Paid (No 80G Benefit) 10,00
Transfer Fees 1,00
Reserve for Bad Debts 11,70
Income Tax Paid 120,00
Mortgage Loan (Dr.) 975,00
Sundry Debtors 25,00
Government Securities Deposited with RBI 37,00
Government Securities 1020,00
Debentures 465,50
Equity Shares of Joint Stock Companies 225,00
Claims Less Re-insurance
Fire 450,00
Marine 358,90
Miscellaneous 68,00 876,90
Premium Less Re-insurance
Fire 1762,50
Marine 1022,50
Miscellaneous 262,25 3047,25
Interest and Dividends Received on Investments (NET) 4680
Tax Deducted at Source 11,70
Commission
Fire 500,00
Marine 350,00
Miscellaneous 80,00 930,00
You are required to make the following provisions :
Depreciation on Furniture—10% of Original Cost
Depreciation on investments of Joint Stock Companies Shares 10,00

© The Institute of Chartered Accountants of India

 5.53 Advanced Accounting

Transfer to General Reserve 10,00

Outstanding claims as on 31.3.2013
Fire 200,00
Marine 50,00
Miscellaneous 32,50
Provision for tax @ 50%. Proposed dividends @20%. Provision for the unexpired risks is to be
made as follows:
(a) On Marine Policies 100% Premium less reinsurance.
(b) On Other Policies 50% Premium less reinsurance.
You are required to prepare the revenue and profit and loss account for the year ended
31.3.2013 of the company.
Solution
Form B – RA (Prescribed by IRDA)
Hercules Insurance Co. Ltd.
Revenue Account for the year ended 31st March, 2013
Fire and Marine and Misc Insurance Businesses
Schedule Fire Marine Misc.
Current Current Current
Year Year Year
` ‘000 ` ‘000 ` ‘000
Premiums earned (net) 1 1681,25 950,00 349,77
Interest, Dividends and Rent – — — —
Gross
Double Income Tax refund — — —
Profit on sale of motor car — — —
Total (A) 1681,25 950,00 349,77
Claims incurred (net) 2 650,00 408,90 100,50
Commission 3 500,00 350,00 80,00
Operating expenses related to 4
Insurance business 280,00 160,00 40,00
Bad debts — — —
Indian and Foreign taxes — 8,00 —
Total (B) 1430,00 926,90 220,50
Profit from Marine Insurance
business ( A−B) 251,25 23,10 129,27

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.54

Schedules forming part of Revenue Account

Schedule –1
Premiums earned (net) Fire Marine Misc.
Current Current Current
Year Year Year
` ‘000 ` ‘000 ` ‘000
Premiums Less reinsurance (net) 1762,50 1022,50 262,25
Change in provision for unexpired risk (-)81,25 (-) 72,50 87,52
Premiums earned (net) 1681, 25 950,00 349,77
Schedule – 2
Claims incurred (net) 650,00 408,90 100,50
Schedule – 3
Commission paid 500,00 350,00 80,00
Schedule – 4
Operating expenses related to insurance business
Expenses of Management 280,00 160,00 40,00
Form B-PL
Hercules Insurance Co. Ltd.
Profit and Loss Account for the year 31st March, 2013
Current Previous
Particulars Schedule
Year Year
` ’ (000) ` ’ (000)
Operating Profit/(Loss)
(a) Fire Insurance 251,25
(b) Marine Insurance 23,10
(c) Miscellaneous 129,27
Income From Investments
(a) Interest, Dividend & Rent–Gross 58,50
Other Income
Transfer Fees 1,00
Total (A) 463,12
Provisions (Other than taxation)
Depreciation of Furniture 10,00
Depreciation of Investments 10,00

© The Institute of Chartered Accountants of India

 5.55 Advanced Accounting

Other Expenses –
Expenses of Management 30,00
Donation 10,00
Total (B) 60,00
Profit Before Tax (A-B) 403,12
Provision for Taxation 206,56
Profit After Tax 196,56
Profit
(a) Interim dividends paid during the year —
(b) Proposed final dividend 64,00
—
(c) Dividend distribution tax
(d) Transfer to General Reserves or Other
Accounts (to be specified) 10,00
12,256
Balance of profit/loss brought forward from last
year 80,40
Balance carried forward to Balance Sheet 202,96
Working Notes:
1. Reserve for unexpired risk 50% of net premium for fire and miscellaneous and 100% of
net premium for marine.
2. Provision for Taxation `
Net Profit before tax 403,12
Add : Donation 10,00
Taxable Profit 413,12
Tax 50%
Illustration 4
The following figures have been extracted from the books of New India Insurance Company
Ltd. in respect of their Marine Business for 2011-2012: (` in lakhs)
Direct Business Income received 50.00 Commission paid on Direct 5.00
Business
Reserve for unexpired risks as on 60.00 Expenses of Management 5.00
1.4.2011
Claims outstanding as on 1.4.2011 20.00 Income tax deducted at 3.00
(net) source
Bad Debts 10.00 Profit and Loss Account:

© The Institute of Chartered Accountants of India

 Financial Statements of Insurance Companies 5.56

(Cr.) balance as on 1.4.2011 10.00

Income from investment and 10.00 Other expenses 1.25
dividends (gross)
Rent received from properties 5.00 Reinsurance premium 5.00
receipts
Investment in government securities 100.00 Outstanding claims as on 30.00
as on 1.4.2011 31.3.2012 (net)
Investment in shares as on 20.00 Direct claims paid (gross) 25.00
1.4.2011
Reinsurance claims paid 4.00
Prepare a Revenue Account and Profit and Loss Account for the year after taking into account
the following further information:
(a) All direct risks are reinsured for 20% of the risk.
(b) Claim a Commission of 25% on reinsurance ceded.
(c) Provide 25% Commission on reinsurance accepted
(d) Market value of investments as on 31st March, 2012 is as follows:
(i) Government Securities ` 105 lakhs.
(ii) Shares ` 18 lakhs.
Adjust separately for each of these two categories of investments.
(e) Provide 65% for Income tax.
Solution
Form B - RA
Name of the Insurer: New India Insurance Company Ltd.
Registration No. and date of registration with the IRDA: ……………..
Revenue Account for the year ended 31st March, 2012
Particulars Schedule Current Previous
Year Year
(` in (` in Lakhs)
Lakhs)
1. Premium earned (net) 1 60.00
2. Profit/Loss on sale/redemption of
investments -
3. Others -
4. Interest, Dividend & Rent-Gross (10+5) 15.00
Total (A) 75.00

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 5.57 Advanced Accounting

1. Claims Incurred (Net) 2 34.00

2. Commission 3 3.75
3. Operating expenses related to insurance 4
business 16.25
Total (B) 54.00
Operating Profit/(Loss) from Marine 21.00
Business (C) = (A-B)
Appropriations
Transfer to Shareholder’s Account –
Transfer to Catastrophe Reserve –
Transfer to other Reserves (to be
specified) –
Total (C) 21.00
Form B – PL
Name of the Insurer: New India Insurance Company Ltd.
Registration No. and date of registration with the IRDA: ……………..
Profit & Loss Account
for the year ended 31st March, 2012
Particulars Schedule Current Previous
Year Year
(` In (` In
Lakhs) Lakhs)
1. Operating Profit from marine insurance 21.00
2. Income from investments -
3. Other Income -
Total (A) 21.00
4. Provision (other than taxation)
Diminution in the value of investment
in shares 2.00
Less: increment in the value of
investment in govt. securities (5.00) (3.00)
5. Other expenses -
Total (B) (3.00)
Profit before tax A-B [i.e. 21 – (-3)] 24.00
Less: Provision for taxation (13.65)

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 Financial Statements of Insurance Companies 5.58

Total 10.35
Appropriations Nil

Balance of profit/loss bought forward from last

year 10.00
Balance carried forward to Balance Sheet 20.35

Schedule 1
Premium Earned (Net)
Particulars Current Year Previous Year
(` in Lakhs) (` in Lakhs)
Premium from direct business 50.00
Add: Premium on re-insurance accepted 5.00
55.00
Less: Premium on re-insurance ceded (10.00)
Net Premium 45.00
Adjustment for change in reserve for unexpired
risk [(opening) 60 – (Closing) 45] 15.00
60.00
Schedule 2
Claims incurred (Net)
Particulars Current Year Previous Year
(` in Lakhs) (` in Lakhs)
Claims paid
Direct 25.00
Add: Reinsurance accepted 4.00
29.00
Less: Reinsurance ceded (5.00)
Net Claims paid 24.00
Add: Claims outstanding at the end of the year 30.00
54.00
Less: Claims outstanding at the beginning of the year (20.00)
Total claims incurred 34.00

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 5.59 Advanced Accounting

Schedule 3
Commission
Particulars Current Year Previous Year
(` in Lakhs) (` in Lakhs)
Commission paid : Direct 5.00
Add: Re-insurance accepted 1.25
6.25
Less: Commission on reinsurance ceded (2.50)
Net Commission 3.75
Schedule 4

Operating Expenses
Particulars Current Year Previous Year
(` in Lakhs) (` in Lakhs)
Expenses of Management 5.00
Bad Debts 10.00
Other expenses 1.25
16.25
Working Note:
Provision for income tax: ` in lakhs
Income (excluding revaluation) 18.00
Add: Tax deducted at source 3.00
21.00
Provision @ 65% of ` 21.00 lakhs 13.65
Less: Tax deducted at source (3.00)
10.65
Illustration 5
From the following information prepare the Revenue Account of Anmol Fire Insurance
Company Ltd. for the year ended 31st March, 2012:
1. Premium, Claims and Commission:
Particulars On Direct On Re-Insurance On Re-insurance
Business ceded accepted
` ` `
(a) Total Premium 30,00,000 10,00,000 20,00,000

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 Financial Statements of Insurance Companies 5.60

In India 80% 80% 80%

(b) Total Claims 6,00,000 2,00,000 4,00,000
Outside India 20% 20% 20%
(c) Commission 3,00,000 1,00,000 2,00,000
2. Expenses:
`
1. Employees’ remuneration and welfare benefits 2,31,000
2. Managerial Remuneration 2,00,000
3. Travel, conveyance and vehicle running expenses 59,000
4. Rents, rates and taxes 30,000
5. Repairs 20,000
6. Printing and Stationery 10,000
7. Communication expenses 5,000
8. Legal and Professional charges 6,000
9. Medical fees 7,000
10. Auditor’s fees, expenses etc. 8,000
11. Advertisement and publicity 6,000
12. Interest and Bank Charges 5,000
13. Policy Stamps 3,000
3. Others:
`
Furniture and fixture (cost ` 1,00,000) 58,000
Rate of Depreciation on furniture – 10% an original cost
Bad Debts 5,000
Indian and Foreign Taxes 95,000
Interest, Dividend and Rent Received 90,000
Income Tax deducted at source thereon 10,000
Profit and Sale of Motor Car 5,000
Double Income Tax Refund 15,000
Provision of Unexpired Risks (as on 1.4.2011) 10,00,000
Additional Provision for Risks (as on 1.4.2011) 1,00,000
Accounting Policy Regarding Additional Provision in Fire- 5% of net
premium of the year

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 5.61 Advanced Accounting

Solution
Fire Insurance Revenue Account for the year ended 31st March, 2012
Particulars Schedule Current Previous
Year Year
(` ‘000) (` ‘000)
1. Premium earned (Net) 1 4,000
2. Other Income:
(a) Profit on sale of Motor Car 5
(b) Double Income Tax Refund 15
3. Change in Provision for Unexpired Risk (1,100)
4. Interest, Dividend and Rent (Gross) 100
Total (A) 3020
1. Claims Incurred (Net) 2 800
2. Commission 3 400
3. Operating expenses related to Insurance 4 600
Business
4. Other Expenses:
Bad Debts 5
Indian and Foreign Taxes 95
Total (B) 1900
Operating Profit from fire Insurance Business 1120
SCHEDULE 1 Premium Earned (Net)
Particulars Current Year Previous Year
(` ‘000) (` ‘000)
Premium for Direct Business written 3,000
Add: Premium on Re-insurance accepted 2,000
Less: Premium on Re-insurance ceded (1000)
Net Premium 4,000
Premium Income from business effected
In India (80%) 3,200
Outside India (20%) 800
4,000

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 Financial Statements of Insurance Companies 5.62

SCHEDULE 2 Claims Incurred (Net)

Particulars Current Year Previous Year
(` ‘000) (` ‘000)
Claim
Direct 600
Add: Re-insurance accepted 400
Less: Re-insurance ceded (200)
Total claim incurred 800
Claim paid to claimants:
In India (80%) 640
Outside India (20%) 160
800
SCHEDULE 3 Commission
Particulars Current Year Previous Year
(` ‘000) (` ‘000)
Commission
Direct 300
Add: Commission on Re-insurance accepted 200
Less: Commission on Re-insurance ceded (100)
Total 400
SCHEDULE 4 Operating Expenses Related to Insurance Business
Current Year Previous Year
Particulars
(` ‘000) (` ‘000)
1. Employees’ remuneration and welfare benefits 231
2. Managerial Remuneration 200
3. Travel, conveyance and vehicle running expenses 59
4. Rents, rates and taxes 30
5. Repairs 20
6. Printing and Stationery 10
7. Communication expenses 5
8. Legal and Professional charges 6
9. Medical fees 7
10 Auditors’ fees, expenses etc. 8
11. Advertisement and publicity 6

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 5.63 Advanced Accounting

12. Interest and Bank Charges 5

13. Policy Stamps 3
14. Depreciation (10% on ` 1,00,000) 10
Total 600
Working Note: Change in Provision for Unexpired Risks
Particulars (`’ 000)
A. Minimum Provision @ 50% of ` 40,00,000 2,000
B. Add: Additional Provision @ 5% of ` 40,00,000 200
C. Total 2,200
D. Less: Opening Balance of Provision
(i) Minimum Provision ` 10,00,000
(ii) Additional Provision for Unexpired Risk ` 1,00,000 1,100
E. Change in Provision for Unexpired Risk [C-D] 1,100
ANNEXURE I
SCHEDULE A for Life Insurance Business
PART I: Accounting principles for preparation of financial statements
1. Applicability of Accounting Standards---Every Balance Sheet, Revenue Account
[Policyholders’ Account], Receipts and Payments Account [Cash Flow statement] and Profit
and Loss Account [Shareholders’ Account] of an insurer shall be in conformity with the
Accounting Standards (AS) issued by the ICAI, to the extent applicable to insurers carrying on
life insurance business, except that:
1. Accounting Standard 3 (AS 3) – Cash Flow Statements – Cash Flow Statement
shall be prepared only under the Direct Method.
2. Accounting Standard 17 (AS 17) - Segment Reporting – shall apply to all insurers
irrespective of the requirements regarding listing and turnover mentioned therein.
2. Premium – Premium shall be recognised as income when due. For linked business the
due date for payment may be taken as the date when the associated units are created.
3. Acquisition Costs – Acquisition costs, if any, shall be expensed in the period in which
they are incurred.
Acquisition costs are those costs that vary with and are primarily related to the acquisition of
new and renewal insurance contracts. The most essential test is the obligatory relationship
between costs and the execution of insurance contracts (i.e., commencement of risk).
4. Claims Cost –The ultimate cost of claims shall comprise the policy benefit amount and
specific claims settlement costs, wherever applicable.
5. Actuarial Valuation – Liability for Life Policies – The estimation of liability against
life policies shall be determined by the appointed actuary of the insurer pursuant to his annual

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 Financial Statements of Insurance Companies 5.64

investigation of the life insurance business. Actuarial assumptions are to be disclosed by way
of notes to the account.
The liability shall be so calculated that together with future premium payments and investment
income, the insurer can meet all future claims (including bonus entitlements to policyholders)
and expenses.
6. Procedure to determine value of investments. – An insurer shall determine the
values of investments in the following manner:-
(a) Real Estate – Investment Property – The value of investment property shall be
determined at historical cost, subject to revaluation at least once in every three years.
The change in the carrying amount of the investment property shall be taken to
Revaluation Reserve.
The insurer shall assess at each balance sheet date whether any impairment of the
investment property has occurred.
Gains/ losses arising due to changes in the carrying amount of real estate shall be
taken to equity under ‘Revaluation Reserve’. The ‘Profit on sale of investments’ or
‘Loss on sale of investments’, as the case may be, shall include accumulated changes
in the carrying amount previously recognised in equity under the heading ‘Revaluation
Reserve’ in respect of a particular property and being recycled to the relevant Revenue
Account or Profit and Loss Account on sale of that property.
The bases for revaluation shall be disclosed in the notes to accounts. The Authority may
issue directions specifying the amount to be released from the revaluation reserve for
declaring bonus to the policyholders. For the removal of doubt, it is clarified that except for
the amount that is released to policyholders as per the Authority’s direction, no other
amount shall be distributed to shareholders out of Revaluation Reserve Account.
An impairment loss shall be recognised as an expense in the Revenue/Profit and Loss
Account immediately, unless the asset is carried at re-valued amount. Any impairment
loss of a re-valued asset shall be treated as a revaluation decrease of that asset and if
the impairment loss exceeds the corresponding revaluation reserve, such excess shall
be recognised as an expense in the Revenue/Profit and Loss Account.
(b) Debt Securities – Debt securities, including government securities and redeemable
preference shares, shall be considered as “held to maturity” securities and shall be
measured at historical cost subject to amortisation.
(c) Equity Securities and Derivative Instruments that are traded in active markets –
Listed equity securities and derivative instruments that are traded in active markets
shall be measured at fair value on the balance sheet date. For the purpose of
calculation of fair value, the lowest of the last quoted closing price at the stock
exchanges where the securities are listed shall be taken.

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 5.65 Advanced Accounting

The insurer shall assess on each balance sheet date whether any impairment of listed
equity security(ies)/ derivative(s) instruments has occurred.
An active market shall mean a market, where the securities traded are homogenous,
availability of willing buyers and willing sellers is normal and the prices are publicly
available.
Unrealised gains/ losses arising due to changes in the fair value of listed equity shares
and derivative instruments shall be taken to equity under the head ‘Fair Value Change
Account”. The ‘Profit on sale of investments’ or ‘Loss on sale of investments’, as the
case may be, shall include accumulated changes in the fair value previously recognised
in equity under the heading ‘Fair Value Change Account’ in respect of a particular
security and being recycled to the relevant Revenue Account or Profit and Loss
Account on actual sale of that listed security.
The Authority may issue directions specifying the amount to be released from the Fair
Value Change Account for declaring bonus to the policyholders. For the removal of
doubt, it is clarified that except for the amount that is released to policyholders as per
the Authority’s prescription, no other amount shall be distributed to shareholders out of
Fair Value Change Account. Also, any debit balance in Fair Value Change Account
shall be reduced from profit/free reserves while declaring dividends.
The insurer shall assess, on each balance sheet date, whether any impairment has
occurred. An impairment loss shall be recognised as an expense in Revenue/Profit and
Loss Account to the extent of the difference between the re-measured fair value of the
security/investment and its acquisition cost as reduced by any previous impairment loss
recognised as expense in Revenue/Profit and Loss Account. Any reversal of impairment
loss, earlier recognised in Revenue/Profit and Loss Account shall be recognised in
Revenue/Profit and Loss Account.
(d) Unlisted and other than actively traded Equity Securities and Derivative
Instruments – Unlisted equity securities and derivative instruments and listed equity
securities and derivative instruments that are not regularly traded in active markets shall
be measured at historical cost. Provision shall be made for diminution in value of such
investments. The provision so made shall be reversed in subsequent periods if estimates
based on external evidence show an increase in the value of the investment over its
carrying amount. The increased carrying amount of the investment due to the reversal of
the provision shall not exceed the historical cost.
For the purposes of this regulation, a security shall be considered as being not actively
traded, if as per guidelines governing mutual funds laid down from time to time by SEBI,
such a security is classified as “thinly traded”.
7. Loans – Loans shall be measured at historical cost subject to impairment provisions.
The insurer shall assess the quality of its loan assets and shall provide for impairment. The
impairment provision shall not be lower than the amounts derived on the basis of guidelines

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 Financial Statements of Insurance Companies 5.66

prescribed from time to time by the Reserve Bank of India that apply to companies and
financial institutions.
8. Linked Business – The accounting principles used for valuation of investments are to
be consistent with principles enumerated above. A separate set of financial statements, for
each segregated fund of the linked businesses, shall be annexed.
Segregated funds represent funds maintained in accounts to meet specific investment
objectives of policyholders who bear the investment risk. Investment income/ gains and losses
generally accrue directly to the policyholders. The assets of each account are segregated and
are not subject to claims that arise out of any other business of the insurer.
9. Funds for Future Appropriation – The funds for future appropriation shall be
presented separately.
The funds for future appropriation represent all funds, the allocation of which, either to the
policyholders or to the shareholders, has not been determined by the end of the financial year.

PART II: Disclosures forming part of Financial Statements

A. The following shall be disclosed by way of notes to the Balance Sheet:
1. Contingent Liabilities:
(a) Partly-paid up investments
(b) Underwriting commitments outstanding
(c) Claims, other than those under policies, not acknowledged as debts
(d) Guarantees given by or on behalf of the company
(e) Statutory demands/liabilities in dispute, not provided for
(f) Reinsurance Obligations to the extent no provided for in accounts
(g) Others (to be specified).
2. Actuarial assumptions for valuation of liabilities for life policies in force.
3. Encumbrances to assets of the company in and outside India.
4. Commitments made and outstanding for Loans, Investments and Fixed Assets.
5. Basis of amortisation of debt securities.
6. Claims settled and remaining unpaid for a period of more than six months as on the
balance sheet date.
7. Value of contracts in relation to investments, for:
(a) Purchases where deliveries are pending;
(b) Sales where payments are overdue.

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 5.67 Advanced Accounting

8. Operating expenses relating to insurance business: basis of allocation of

expenditure to various segments of business.
9. Computation of managerial remuneration.
10. Historical costs of those investments valued on fair value basis.
11. Basis of revaluation of investment property.
B. The following accounting policies shall form an integral part of the financial
statements:
1. All significant accounting policies in terms of the accounting standards issued by the
ICAI, and significant principles and policies given in Part I of Accounting Principles.
Any other accounting policies, followed by the insurer, shall be stated in the manner
required under Accounting Standard AS 1 issued by the ICAI.
2. Any departure from the accounting policies shall be separately disclosed with
reasons for such departure.
C. The following information shall also be disclosed:
1. Investments made in accordance with any statutory requirement should be
disclosed separately together with its amount, nature, security and any special
rights in and outside India;
2. Segregation into performing/ non performing investments for purpose of income
recognition as per the directions, if any, issued by the Authority;
3. Assets to the extent required to be deposited under local laws or otherwise
encumbered in or outside India;
4. Percentage of business sector-wise;
5. A summary of financial statements for the last five years, in the manner as may be
prescribed by the Authority;
6. Bases of allocation of investments and income thereon between Policyholders’
Account and Shareholders’ Account;
7. Accounting Ratios as may be prescribed by the Authority.
PART III: General instructions for preparation of Financial Statements
1. The corresponding amounts for the immediately preceding financial year for all items
shown in the Balance Sheet, Revenue Account, Profit and Loss Account and Receipts
and Payments Account shall be given.
2. The figures in the financial statements may be rounded off to the nearest thousands.
3. Interest, dividends and rentals receivable in connection with an investment should be
stated at gross amount, the amount of income tax deducted at source should be included
under 'advance taxes paid' and taxes deducted at source.

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 Financial Statements of Insurance Companies 5.68

1. (I) For the purposes of financial statements, unless the context otherwise requires -
(a) the expression ‘provision’ shall, subject to (II) below mean 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 or loss of which the
amount cannot be determined with substantial accuracy;
(b) the expression ‘reserve’ shall not, subject to as aforesaid, 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 or loss;
(c) the expression ‘capital reserve’ shall not include any amount regarded as free for
distribution through the profit and loss account; and the expression ‘revenue
reserve’ shall mean any reserve other than a capital reserve;
(d) The expression "liability" shall include all liabilities in respect of expenditure
contracted for and all disputed or contingent liabilities.
(II) Where:
(a) any amount written off or retained by way of providing for depreciation, renewals or
diminution in value of assets, or
(b) any amount retained by way of providing for any known liability or loss, is in excess
of the amount which in the opinion of the directors is reasonably necessary for the
purpose, the excess shall be treated as a reserve and not provision.
5. The company shall make provisions for damages under lawsuits where the management
is of the opinion that the award may go against the insurer.
6. Extent of risk retained and re-insured shall be separately disclosed.
7. Any debit balance of the Profit and Loss Account shall be shown as deduction from
uncommitted reserves and the balance, if any, shall be shown separately.

PART IV: Contents of Management Report

There shall be attached to the financial statements, a management report duly authenticated
by the management.

PART V: Preparation of Financial Statements

1. An insurer shall prepare the Revenue Account [Policyholders’ Account], Profit and
Loss Account [Shareholders’ Account] and the Balance Sheet in Form A-RA, Form A-
PL and Form A-BS, as prescribed in this Part, or as near thereto as the
circumstances permit.

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 5.69 Advanced Accounting

Provided that an insurer shall prepare Revenue Account and Balance Sheet for the
under mentioned businesses separately and to that extent the application of AS 17
shall stand modified:-

(a) Participating policies and Non-participating policies;

(b) (i) Linked business [As defined in regulation 2 (i) of the IRDA (Registration of
Indian Insurance Companies ) Regulations , 2000]

(ii) Non-Linked business separately for Ordinary Life, General Annuity,

pensions and Health Insurance;

Business within India and business outside India.

2. An insurer shall prepare separate Receipts and Payments Account in accordance with the
Direct Method prescribed in AS 3 – “Cash Flow Statement” issued by the ICAI.
FORM A-RA
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
REVENUE ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20___.
Policyholders’ Account (Technical Account)
Particulars Schedule Current Previous
Year Year
(`’000) (`’000).
Premiums earned – net
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance accepted-
Income from Investments
(a) Interest, Dividends & Rent – Gross
(b) Profit on sale/redemption of investments
(c) (Loss on sale/ redemption of investments)
(d) Transfer/Gain on revaluation/change in fair
value*
Other Income (to be specified)
TOTAL (A)

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 Financial Statements of Insurance Companies 5.70

Commission 2
Operating Expenses related to Insurance Business 3
Provision for doubtful debts
Bad debts written off
Provision for Tax
Provisions (other than taxation)
(a) For diminution in the value of investments
(Net)
(b) Others (to be specified)
TOTAL (B)
Benefits Paid (Net) 4
Interim Bonuses Paid
Change in valuation of liability in respect of life
policies
(a) Gross**
(b) Amount ceded in Reinsurance
(c) Amount accepted in Reinsurance
TOTAL (C)
SURPLUS/ (DEFICIT) (D) =(A)-(B)-(C)
APPROPRIATIONS
Transfer to Shareholders’ Account
Transfer to Other Reserves (to be specified)
Balance being Funds for Future Appropriations
TOTAL (D)
Notes:
* Represents the deemed realised gain as per norms specified by the Authority.
** represents Mathematical Reserves after allocation of bonus
The total surplus shall be disclosed separately with the following details:
(a) Interim Bonuses Paid:
(b) Allocation of Bonus to policyholders:
(c) Surplus shown in the Revenue Account:
(d) Total Surplus: [(a)+(b)+(c)].
See Notes appended at the end of Form A-PL

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 5.71 Advanced Accounting

FORM A-PL
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20___.
Shareholders’ Account (Non-technical Account)
Particulars Schedule Current Previous
Year Year
(`’000) (`’000)
Amounts transferred from/to the Policyholders
Account (Technical Account)
Income From Investments
(a) Interest, Dividends & Rent – Gross
(b) Profit on sale/redemption of investments
(c) (Loss on sale/ redemption of investments)
Other Income (To be specified)
TOTAL (A)
Expense other than those directly related to the
insurance business
Bad debts written off
Provisions (Other than taxation)
(a) For diminution in the value of investments
(Net)
(b) Provision for doubtful debts
(c) Others (to be specified)
TOTAL (B)
Profit/ (Loss) before tax
Provision for Taxation
Profit / (Loss) after tax
APPROPRIATIONS
(a) Balance at the beginning of the year
(b) Interim dividends paid during the year
(c) Proposed final dividend
(d) Dividend distribution on tax

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 Financial Statements of Insurance Companies 5.72

(e) Transfer to reserves/ other accounts (to be

specified)
Profit carried ------------to the Balance Sheet
Notes to Form A-RA and A-PL.
(a) Premium income received from business concluded in and outside India shall be
separately disclosed.
(b) Reinsurance premiums whether on business ceded or accepted are to be brought into
account gross (i.e. before deducting commissions) under the head reinsurance
premiums.
(c) Claims incurred shall comprise claims paid, specific claims settlement costs wherever
applicable and change in the outstanding provision for claims at the year-end.
(d) Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or `5,00,000 whichever is higher, shall be shown as a separate line item.
(e) Fees and expenses connected with claims shall be included in claims.
(f) Under the sub-head "Others” shall be included items like foreign exchange gains or
losses and other items.
(g) Interest, dividends and rentals receivable in connection with an investment should be
stated as gross amount, the amount of income tax deducted at source being included
under 'advance taxes paid and taxes deducted at source”.
(h) Income from rent shall include only the realised rent. It shall not include any notional rent.
FORM A-BS
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
BALANCE SHEET AS AT 31ST MARCH, 20____.
Schedule Current Previous
Year Year
(`’000) (`’000)
Sources of Funds
Shareholders’ Funds:
Share Capital 5
Reserves and Surplus 6
Credit/[Debit] Fair Value Change Account
Sub-Total

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 5.73 Advanced Accounting

Borrowings 7
Policyholders’ Funds:
Credit/[Debit] Fair Value Change Account
Policy Liabilities
Insurance Reserves
Provision for Linked Liabilities
Sub-Total
Funds for Future Appropriations
Total
Application of Funds
Investments
Shareholders’ 8
Policyholders’ 8A
Assets held to cover Linked Liabilities 8B
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balances 11
Advances and Other Assets 12
Sub-Total (A)
Current Liabilities 13
Provisions 14
Sub-Total (B)
Net Current Assets (C) = (A – B)
Miscellaneous Expenditure (To the extent not 15
written off or adjusted)
Debit Balance in Profit & Loss Account
(Shareholders’ Account)
Total

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 Financial Statements of Insurance Companies 5.74

CONTINGENT LIABILITIES
Particulars Current Previous
Year Year
(`’000) (`’000)
1. Partly paid-up investments
2. Claims, other than against policies, not acknowledged as
debts by the company
3. Underwriting commitments outstanding (in respect of
shares and securities)
4. Guarantees given by or on behalf of the Company
5. Statutory demands/ liabilities in dispute, not provided for
6. Reinsurance obligations to the extent not provided for in
accounts
7. Others (to be specified)
Total
SCHEDULES FORMING PART OF FINANCIAL STATEMENTS
SCHEDULE – 1
PREMIUM
Particulars Current Year Previous Year
(`’000) (`’000)
1 First year premiums
2 Renewal Premiums
3 Single Premiums
TOTAL PREMIUM
SCHEDULE- 2
COMMISSION EXPENSES
Particulars Current Year Previous Year
(`’000) (`’000)
Commission paid
Direct – First year premiums
- Renewal premiums
- Single premiums
Add: Commission on Re-insurance Accepted
Less: Commission on Re-insurance Ceded
Net Commission

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 5.75 Advanced Accounting

Note: The profit/ commission, if any, are to be combined with the Re-insurance accepted or
Re-insurance ceded figures.
SCHEDULE – 3
OPERATING EXPENSES RELATED TO INSURANCE BUSINESS
Particulars Current Year Previous Year
(`’000) (`’000)
1. Employees’ remuneration & welfare benefits
2 Travel, conveyance and vehicle running expenses
3 Training expenses
4 Rents, rates & taxes
5 Repairs
6 Printing & stationery
7 Communication expenses
8 Legal & professional charges
9 Medical fees
10 Auditors' fees, expenses etc
a) as auditor
b) as adviser or in any other capacity, in respect of
(i) Taxation matters
(ii) Insurance matters
(iii) Management services; and
c) in any other capacity
11 Advertisement and publicity
12 Interest & Bank Charges
13 Others (to be specified)
14 Depreciation
TOTAL
Note : Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or `5,00,000 whichever is higher, shall be shown as a separate line item.
SCHEDULE – 4
BENEFITS PAID [NET]
Particulars Current Year Previous Year
(`’000) (`’000)
1. Insurance Claims
Claims by Death,
Claims by Maturity,
Annuities/Pension payment,
Other benefits, specify

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 Financial Statements of Insurance Companies 5.76

2. (Amount ceded in reinsurance):

(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities/Pension payment,
(d) Other benefits, specify
3. Amount accepted in reinsurance:
(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities/Pension payment,
(d) Other benefits, specify
TOTAL
Notes:
(a) Claims include specific claims settlement costs, wherever applicable.
(b) Legal and other fees and expenses shall also form part of the claims cost, wherever applicable.
SCHEDULE – 5
SHARE CAPITAL
Particulars Current Previous
Year Year
(`’000) (`’000)
1. Authorised Capital
Equity Shares of `.... each
2. Issued Capital
Equity Shares of ` .....each
3. Subscribed Capital
Equity Shares of `......each
4. Called-up Capital
Equity Shares of ` .....each
Less : Calls unpaid
Add : Shares forfeited (Amount originally paid up)
Less : Par value of Equity Shares bought back
Less : Preliminary Expenses
Expenses including commission or brokerage on
Underwriting or subscription of shares
TOTAL
Notes:
(a) Particulars of the different classes of capital should be separately stated.
(b) The amount capitalised on account of issue of bonus shares should be disclosed.
(c) In case any part of the capital is held by a holding company, the same should be
separately disclosed.

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 5.77 Advanced Accounting

SCHEDULE – 5A
PATTERN OF SHAREHOLDING
[As certified by the Management]
Shareholder Current Year Previous Year
Number of % of Number of % of
Shares Holding Shares Holding
Promoters
• Indian
• Foreign
Others
TOTAL
SCHEDULE – 6
RESERVES AND SURPLUS
Particulars Current Year Previous
Year
(`’000) (`’000)
1. Capital Reserve
2. Capital Redemption Reserve
3 Share Premium
4. Revaluation Reserve
5. General Reserves
Less: Debit balance in Profit and Loss Account, if any
Less: Amount utilized for Buy-back
6. Catastrophe Reserve
7. Other Reserves (to be specified)
8. Balance of profit in Profit and Loss Account
TOTAL
Note: Additions to and deductions from the reserves shall be disclosed under each of the specified heads.
SCHEDULE - 7
BORROWINGS
Particulars Current Year Previous Year
(`’000) (`’000)
1. Debentures/ Bonds
2. Banks
3. Financial Institutions
4. Others (to be specified)
TOTAL
Notes:
(a) The extent to which the borrowings are secured shall be separately disclosed stating the
nature of the security under each sub-head.
(b) Amounts due within 12 months from the date of Balance Sheet should be shown separately

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 Financial Statements of Insurance Companies 5.78

SCHEDULE – 8
INVESTMENTS-SHAREHOLDERS
Particulars Current Previous
Year Year
(`’000) (`’000)
LONG TERM INVESTMENTS
1. Government securities and Government guaranteed
bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
SHORT TERM INVESTMENTS
1. Government securities and Government guaranteed
bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
TOTAL
Note: See Notes appended at the end of Schedule- 8B

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 5.79 Advanced Accounting

SCHEDULE- 8A
INVESTMENTS-POLICYHOLDERS
Particulars Current Previous
Year Year
(`’000) (`’000)
LONG TERM INVESTMENTS
1. Government securities and Government guaranteed
bonds including Treasury Bills
2. Other Approved Securities
3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
SHORT TERM INVESTMENTS
1. Government securities and Government guaranteed
bonds including Treasury Bills
2. Other Approved Securities
3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(a) Derivative Instruments
(b) Debentures/ Bonds
(c) Other Securities (to be specified)
(d) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
TOTAL
Note: See Notes appended at the end of Schedule- 8B

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 Financial Statements of Insurance Companies 5.80

SCHEDULE- 8B
ASSETS HELD TO COVER LINKED LIABILITIES
Particulars Current Previous
Year Year
(`’000) (`’000)
LONG TERM INVESTMENTS
1. Government securities and Government guaranteed
bonds including Treasury Bills
2. Other Approved Securities
3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
SHORT TERM INVESTMENTS
1. Government securities and Government guaranteed
bonds including Treasury Bills
2. Other Approved Securities
3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c ) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
TOTAL
Notes (applicable to Schedules 8 and 8A & 8B):

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 5.81 Advanced Accounting

(a) Investments in subsidiary/holding companies, joint ventures and associates shall be

separately disclosed, at cost.
(i) Holding company and subsidiary shall be construed as defined in the Companies
Act, 1956:
(ii) Joint Venture is a contractual arrangement whereby two or more parties undertake
an economic activity, which is subject to joint control.
(iii) Joint control - is the contractually agreed sharing of power to govern the financial
and operating policies of an economic activity to obtain benefits from it.
(iv) Associate - is an enterprise in which the company has significant influence and
which is neither a subsidiary nor a joint venture of the company.
(v) Significant influence (for the purpose of this schedule) -means participation in the
financial and operating policy decisions of a company, but not control of those policies.
Significant influence may be exercised in several ways, for example, by representation
on the board of directors, participation in the policymaking process, material inter-
company transactions, interchange of managerial personnel or dependence on technical
information. Significant influence may be gained by share ownership, statute or
agreement. As regards share ownership, if an investor holds, directly or indirectly
through subsidiaries, 20 percent or more of the voting power of the investee, it is
presumed that the investor does have significant influence, unless it can be clearly
demonstrated that this is not the case. Conversely, if the investor holds, directly or
indirectly through subsidiaries, less than 20 percent of the voting power of the investee,
it is presumed that the investor does not have significant influence, unless such
influence is clearly demonstrated. A substantial or majority ownership by another
investor does not necessarily preclude an investor from having significant influence.
(b) Aggregate amount of company's investments other than listed equity securities and
derivative instruments and also the market value thereof shall be disclosed.
(c) Investment made out of Catastrophe reserve should be shown separately.
(d) Debt securities will be considered as “held to maturity” securities and will be measured at
historical costs subject to amortisation
(e) Investment Property means a property [land or building or part of a building or both] held
to earn rental income or for capital appreciation or for both, rather than for use in
services or for administrative purposes.
(f) Investments maturing within twelve months from balance sheet date and investments
made with the specific intention to dispose of within twelve months from balance sheet
date shall be classified as short-term investments

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 Financial Statements of Insurance Companies 5.82

SCHEDULE - 9
LOANS
Particulars Current Year Previous Year
(`’000) (`’000)
1. SECURITY-WISE CLASSIFICATION
Secured
(a) On mortgage of property
(aa) In India
(bb) Outside India
(b) On Shares, Bonds, Govt. Securities,
etc.
(c) Loans against policies
(d) Others (to be specified)
Unsecured
TOTAL
2. BORROWER-WISE CLASSIFICATION
(a) Central and State Governments
(b) Banks and Financial Institutions
(c) Subsidiaries
(d) Companies
(e) Loans against policies
(f) Others (to be specified)
TOTAL
3. PERFORMANCE-WISE CLASSIFICATION
(a) Loans classified as standard
(aa) In India
(bb) Outside India
(b) Non-standard loans less provisions
(aa) In India
(bb) Outside India
TOTAL
4. MATURITY-WISE CLASSIFICATION
(a) Short Term
(b) Long Term
TOTAL
Notes:
(a) Short-term loans shall include those, which are repayable within 12 months from the date
of balance sheet. Long term loans shall be the loans other than short-term loans.
(b) Provisions against non-performing loans shall be shown separately.

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 5.83 Advanced Accounting

(c) The nature of the security in case of all long term secured loans shall be specified in
each case. Secured loans for the purposes of this schedule, means loans secured
wholly or partly against an asset of the company.
(d) Loans considered doubtful and the amount of provision created against such loans shall
be disclosed.
SCHEDULE - 10
FIXED ASSETS
(`’000)
Particulars Cost/ Gross Block Depreciation Net Block
Opening Additions Deductions Closing Up to For On To As at Previou
Last The Sales/ Date year s Year
Year Year Adjust end
ments
Goodwill
Intangibles
(specify)
Land-
Freehold
Leasehold
Property
Buildings
Furniture &
Fittings
Information
Technology
Equipment
Vehicles
Office
Equipment
Others
(Specify
nature)
TOTAL
Work in
progress
Grand Total
PREVIOUS
YEAR
Note: Assets included in land, property and building above exclude Investment Properties as
defined in note (e) to Schedule 8.

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 Financial Statements of Insurance Companies 5.84

SCHEDULE- 11
CASH AND BANK BALANCES
Particulars Current Previous
Year Year
(`’000) (`’000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
(a) Deposit Accounts
(aa) Short-term (due within 12 months of the
date of Balance Sheet)
(bb) Others
(b) Current Accounts
(c) Others (to be specified)
3. Money at Call and Short Notice
(a) With Banks
(b) With other Institutions
4. Others (to be specified)
TOTAL
Balances with non-scheduled banks included in 2 and 3
above
CASH & BANK BALANCES
1 In India
2 Outside India
TOTAL
Note: Bank balance may include remittances in transit. If so, the nature and amount shall be
separately stated.
SCHEDULE – 12
ADVANCES AND OTHER ASSETS
Particulars Current Year Previous Year
(`’000) (`’000)
ADVANCES
1. Reserve deposits with ceding companies
2. Application money for investments
3. Prepayments
4. Advances to Directors/Officers
5. Advance tax paid and taxes deducted at

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 5.85 Advanced Accounting

source (Net of provision for taxation)

6. Others (to be specified)
TOTAL (A)
OTHER ASSETS
1. Income accrued on investments
2. Outstanding Premiums
3. Agents’ Balances
4. Foreign Agencies Balances
5 Due from other entities carrying on
insurance business (including reinsures)
6. Due from subsidiaries/ holding company
7. Deposit with Reserve Bank of India
[Pursuant to section 7 of Insurance Act,
1938]
8. Others (to be specified)
TOTAL (B)
TOTAL (A+B)
Notes:
(a) The items under the above heads shall not be shown net of provisions for doubtful
amounts. The amount of provision against each head should be shown separately.
(b) The term ‘officer’ should conform to the definition of that term as given under the
Companies Act, 1956.
(c) Sundry debtors will be shown under item 8 (Others)
SCHEDULE – 13
CURRENT LIABILITIES
Particulars Current Year Previous Year
(`’000) (`’000)
1. Agents’ Balances
2. Balances due to other insurance companies
3. Deposits held on re-insurance ceded
4. Premiums received in advance
5. Unallocated premium
6. Sundry creditors

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 Financial Statements of Insurance Companies 5.86

7. Due to subsidiaries/ holding company

8. Claims Outstanding
9. Annuities Due
10. Due to Officers/ Directors
11. Others (to be specified)
TOTAL
SCHEDULE – 14
PROVISIONS
Particulars Current Year Previous
Year
(`’000) (`’000)
1. For taxation (less payments and taxes deducted at
source)
2. For proposed dividends
3. For dividend distribution tax
4. Others (to be specified)
TOTAL
SCHEDULE – 15
MISCELLANEOUS EXPENDITURE
(To the extent not written off or adjusted)
Particulars Current Year Previous Year
(`’000) (`’000)
1. Discount Allowed in issue of shares/ debentures
2. Others (to be specified)
TOTAL
Notes:
(a) No item shall be included under the head “Miscellaneous Expenditure” and carried
forward unless:
1 some benefit from the expenditure can reasonably be expected to be received in
future, and
2 the amount of such benefit is reasonably determinable.
(b) The amount to be carried forward in respect of any item included under the head
“Miscellaneous Expenditure” shall not exceed the expected future revenue/other benefits
related to the expenditure.

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 5.87 Advanced Accounting

ANNEXURE II
SCHEDULE B for General Insurance Business
PART I: Accounting principles for preparation of financial statements
1. Applicability of Accounting Standards---Every Balance Sheet, Receipts and
Payments Account [Cash Flow statement] and Profit and Loss Account [Shareholders’
Account] of the insurer shall be in conformity with the Accounting Standards (AS) issued by
the ICAI, to the extent applicable to the insurers carrying on general insurance business,
except that:
1. Accounting Standard 3 (AS 3) – Cash Flow Statements – Cash Flow Statement shall
be prepared only under the Direct Method.
2. Accounting Standard 13 (AS 13) – Accounting for Investments, shall not be
applicable.
3. Accounting Standard 17 (AS 17) - Segment Reporting – shall apply to all insurers
irrespective of the requirements regarding listing and turnover mentioned therein.
2. Premium--Premium shall be recognised as income over the contract period or the
period of risk, whichever is appropriate. Premium received in advance, which represents
premium income not relating to the current accounting period, shall be disclosed separately in
the financial statements.
A reserve for unexpired risks shall be created as the amount representing that part of the
premium written which is attributable to, and to be allocated to the succeeding accounting
periods and shall not be less than as required under section 64 V(1) (ii) (b) of the Act.
Premium Received in Advance, which represents premium received prior to the
commencement of the risk, shall be shown separately under the head ‘Current Liabilities’ in
the financial statements.
3. Premium Deficiency--Premium deficiency shall be recognised if the sum of expected
claim costs, related expenses and maintenance costs exceeds related reserve for unexpired
risks.
4. Acquisition Costs---Acquisition costs, if any, shall be expensed in the period in which
they are incurred.
Acquisition costs are those costs that vary with, and are primarily related to, the acquisition of
new and renewal insurance contracts. The most essential test is the obligatory relationship
between costs and the execution of insurance contracts (i.e. commencement of risk).
5. Claims--The components of the ultimate cost of claims to an insurer comprise the
claims under policies and specific claims settlement costs. Claims under policies comprise the
claims made for losses incurred, and those estimated or anticipated under the policies
following a loss occurrence.

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 Financial Statements of Insurance Companies 5.88

A liability for outstanding claims shall be brought to account in respect of both direct business
and inward reinsurance business. The liability shall include: -
(a) Future payments in relation to unpaid reported claims;
(b) Claims Incurred But Not Reported (IBNR) including inadequate reserves [sometimes
referred to as Claims Incurred But Not Enough Reported (IBNER)],
which will result in future cash/asset outgo for settling liabilities against those claims. Change
in estimated liability represents the difference between the estimated liability for outstanding
claims at the beginning and at the end of the financial period.
The accounting estimate shall also include claims cost adjusted for estimated salvage value if
there is sufficient degree of certainty of its realisation.
Actuarial Valuation of claim liability – in some cases
Claims made in respect of contracts where the claims payment period exceeds four years
shall be recognised on an actuarial basis, subject to regulations that may be prescribed by the
Authority. In such cases, certificate from a recognised actuary as to the fairness of liability
assessment must be obtained. Actuarial assumptions shall be suitably disclosed by way of
notes to the account.
6. Procedure to determine the value of investments.---An insurer shall determine the
values of investments in the following manner:-
(a) Real Estate – Investment Property-- Investment Property shall be measured at
historical cost less accumulated depreciation and impairment loss, residual value being
considered zero and no revaluation being permissible.
The Insurer shall assess at each balance sheet date whether any impairment of the
investment property has occurred.
An impairment loss shall be recognised as an expense in the Revenue/Profit and Loss
Account immediately.
Fair value as at the balance sheet date and the basis of its determination shall be disclosed in
the financial statements as additional information.
(b) Debt Securities--Debt securities including government securities and redeemable
preference shares shall be considered as “held to maturity” securities and shall be measured
at historical cost subject to amortisation.
(c) Equity Securities and Derivative Instruments that are traded in active markets---
Listed equity securities and derivative instruments that are traded in active markets shall be
measured at fair value as at the balance sheet date. For the purpose of calculation of fair
value, the lowest of the last quoted closing price of the stock exchanges where the securities
are listed shall be taken.
The insurer shall assess on each balance sheet date whether any impairment of listed equity
security(ies)/ derivative(s) instruments has occurred.

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 5.89 Advanced Accounting

An active market shall mean a market, where the securities traded are homogenous,
availability of willing buyers and willing sellers is normal and the prices are publicly available.
Unrealised gains/losses arising due to changes in the fair value of listed equity shares and
derivative instruments shall be taken to equity under the head ‘Fair Value Change Account’.
The ‘Profit on sale of investments’ or ‘Loss on sale of investments’, as the case may be, shall
include accumulated changes in the fair value previously recognised in equity under the
heading Fair Value Change Account in respect of a particular security and being recycled to
Profit and Loss Account on actual sale of that listed security.
For the removal of doubt, it is clarified that balance or any part thereof shall not be available
for distribution as dividends. Also, any debit balance in the said Fair Value Change Account
shall be reduced from the profits/free reserves while declaring dividends.
The insurer shall assess, at each balance sheet date, whether any impairment has occurred.
An impairment loss shall be recognised as an expense in Revenue/Profit and Loss Account to
the extent of the difference between the remeasured fair value of the security/ investment and
its acquisition cost as reduced by any previous impairment loss recognised as expense in
Revenue/Profit and Loss Account. Any reversal of impairment loss, earlier recognised in
Revenue/Profit and Loss Account shall be recognised in Revenue/Profit and Loss Account.
(d) Unlisted and other than actively traded Equity Securities and Derivative
Instruments--Unlisted equity securities and derivative instruments and listed equity securities
and derivative instruments that are not regularly traded in active market will be measured at
historical costs. Provision shall be made for diminution in value of such investments. The
provision so made shall be reversed in subsequent periods if estimates based on external
evidence show an increase in the value of the investment over its carrying amount. The
increased carrying amount of the investment due to the reversal of the provision shall not
exceed the historical cost.
For the purposes of this regulation, a security shall be considered as being not actively traded,
if as per guidelines governing mutual funds laid down from time to time by SEBI, such a
security is classified as “thinly traded”.
7. Loans--Loans shall be measured at historical cost subject to impairment provisions.
The insurer shall assess the quality of its loan assets and shall provide for impairment. The
impairment provision shall not be lower than the amounts derived on the basis of guidelines
prescribed from time to time by the Reserve Bank of India, that apply to companies and
financial institutions.
8. Catastrophe Reserve -- Catastrophe reserve shall be created in accordance with
norms, if any, prescribed by the Authority. Investment of funds out of catastrophe reserve shall
be made in accordance with prescription of the Authority.

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 Financial Statements of Insurance Companies 5.90

PART II: Disclosures forming part of Financial Statements

A. The following shall be disclosed by way of notes to the Balance Sheet:
1. Contingent Liabilities:
(a) Partly-paid up investments
(b) Underwriting commitments outstanding
(c) Claims, other than those under policies, not acknowledged as debts
(d) Guarantees given by or on behalf of the company
(e) Statutory demands/liabilities in dispute, not provided for
(f) Reinsurance obligations to the extent not provided for in accounts
(g) Others (to be specified)
2. Encumbrances to assets of the company in and outside India.
3. Commitments made and outstanding for Loans, Investments and Fixed Assets.
4. Claims, less reinsurance, paid to claimants in/outside India.
5. Actuarial assumptions for determination of claim liabilities in the case of claims
where the claims payment period exceed four years.
6. Ageing of claims – distinguishing between claims outstanding for more than six
months and other claims.
7. Premiums, less reinsurance, written from business in/outside India.
8. Extent of premium income recognised, based on varying risk pattern, category wise,
with basis and justification therefor, including whether reliance has been placed on
external evidence.
9. Value of contracts in relation to investments, for:
(a) Purchases where deliveries are pending;
(b) Sales where payments are overdue.
10. Operating expenses relating to insurance business: basis of allocation of
expenditure to various classes of business.
11. Historical costs of those investments valued on fair value basis.
12. Computation of managerial remuneration.
13. Basis of amortisation of debt securities.
14. (a) Unrealised gain/losses arising due to changes in the fair value of listed equity
shares and derivative instruments are to be taken to equity under the head
‘Fair Value Change Account’ and on realisation reported in profit and loss
Account.

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 5.91 Advanced Accounting

(b) Pending realisation, the credit balance in the ‘Fair Value Change Account’ is
not available for distribution.
15. Fair value of investment property and the basis therefor.
16. Claims settled and remaining unpaid for a period of more than six months as on the
balance sheet date.
B. The following accounting policies shall form an integral part of the financial
statements:
1. All significant accounting policies in terms of the accounting standards issued by the
ICAI, and significant principles and policies given in Part I of Accounting Principles.
Any other accounting policies followed by the insurer shall be stated in the manner
required under Accounting Standard AS 1 issued by the ICAI.
2. Any departure from the accounting policies as aforesaid shall be separately
disclosed with reasons for such departure.
C. The following information shall also be disclosed:
1. Investments made in accordance with any statutory requirement should be
disclosed separately together with its amount, nature, security and any special
rights in and outside India.
2. Segregation into performing/ non performing investments for purpose of income
recognition as per the directions, if any, issued by the Authority.
3. Percentage of business sector-wise.
4. A summary of financial statements for the last five years, in the manner as may be
prescribed by the Authority.
5. Accounting Ratios as may be prescribed by the Authority.
6. Basis of allocation of Interest, Dividends and Rent between Revenue Account and
Profit and Loss Account.
PART III: GENERAL INSTRUCTIONS FOR PREPARATION OF FINANCIAL STATEMENTS
1. The corresponding amounts for the immediately preceding financial year for all items
shown in the Balance Sheet, Revenue Account and Profit and Loss Account should be
given.
2. The figures in the financial statements may be rounded off to the nearest thousands.
3. Interest, dividends and rentals receivable in connection with an investment should be
stated as gross value, the amount of income tax deducted at source being included
under 'advance taxes paid'.
4. Income from rent shall not include any notional rent.

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 Financial Statements of Insurance Companies 5.92

5. (I) For the purposes of financial statements, unless the context otherwise requires -
(a) the expression ‘provision’ shall, subject to note II below mean 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 or loss of which
the amount cannot be determined with substantial accuracy;
(b) the expression "reserve" shall not, subject to as aforesaid, 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;
(c) the expression capital reserve shall not include any amount regarded as free for
distribution through the profit and loss account; and the expression "revenue
reserve" shall mean any reserve other than a capital reserve;
(d) The expression "liability" shall include all liabilities in respect of expenditure
contracted for and all disputed or contingent liabilities.
(II) Where:
(a) any amount written off or retained by way of providing for depreciation, renewals
or diminution in value of assets, or
(b) any amount retained by way of providing for any known liability is in excess of the
amount which in the opinion of the directors is reasonably necessary for the
purpose, the excess shall be treated for the purposes of these accounts as a
reserve and not as a provision.
1. The company should make provisions for damages under lawsuits where
the management is of the opinion that the award may go against the
insurer.
2. Extent of risk retained and reinsured shall be separately disclosed.
3. Any debit balance of Profit and Loss Account shall be shown as
deduction from uncommitted reserves and the balance if any, shall be
shown separately.
PART IV: CONTENTS OF MANAGEMENT REPORT
There shall be attached to the financial statements, a management report duly authenticated
by the management.
PART V: Preparation of Financial Statements
(1) An insurer shall prepare the Revenue Account, Profit and Loss Account [Shareholders’
Account] and the Balance Sheet in Form B-RA, Form B-PL, and Form B-BS, or as near thereto
as the circumstances permit.
Provided that an insurer shall prepare Revenue Accounts separately for fire, marine, and
miscellaneous insurance business and separate schedules shall be prepared for Marine

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Cargo, Marine – Other than Marine Cargo and the following classes of miscellaneous
insurance business under miscellaneous insurance and accordingly application of AS 17 –
Segment Reporting - shall stand modified.
1. Motor 2. Workmen’s Compensation/Employers’ Liability
3. Public/Product Liability 4. Engineering
5. Aviation 6. Personal Accident
7. Health Insurance 8. Others
(2) An insurer shall prepare separate Receipts and Payments Account in accordance with
the Direct Method prescribed in AS 3 – “Cash Flow Statement” issued by the ICAI.
FORM B-RA
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
REVENUE ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20___.
Particulars Schedul Current Previous
e Year Year
(`’000) (`’000)
1. Premiums earned (Net) 1

2. Profit/ Loss on sale/redemption of Investments

3. Others (to be specified)

4. Interest, Dividend & Rent – Gross

TOTAL (A)
1. Claims Incurred (Net) 2
2. Commission 3
3. Operating Expenses related to Insurance 4
Business
TOTAL (B)
Operating Profit/(Loss) from
Fire/Marine/Miscellaneous Business C= (A -
B)
APPROPRIATIONS
Transfer to Shareholders’ Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves (to be specified)
TOTAL (C)

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 Financial Statements of Insurance Companies 5.94

FORM B-PL
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20___.
Particulars Schedule Current Previous
Year Year
(`’000) (`’000)
1. OPERATING PROFIT/(LOSS)
(a) Fire Insurance
(b) Marine Insurance
(c ) Miscellaneous Insurance
2. INCOME FROM INVESTMENTS
(a) Interest, Dividend & Rent – Gross
(b) Profit on sale of investments
Less: Loss on sale of investments
3. OTHER INCOME (To be specified)
TOTAL (A)
4. PROVISIONS (Other than taxation)
(a) For diminution in the value of
investments
(b) For doubtful debts
(c) Others (to be specified)
5. OTHER EXPENSES
(a) Expenses other than those related to
Insurance Business
(b) Bad debts written off
(c) Others (To be specified)
TOTAL (B)
Profit Before Tax
Provision for Taxation
APPROPRIATIONS
(a) Interim dividends paid during the year
(b) Proposed final dividend
(c) Dividend distribution tax
(d) Transfer to any Reserves or Other
Accounts (to be specified)
Balance of profit/ loss brought forward from last
year
Balance carried forward to Balance Sheet

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Notes: to Form B-RA and B- PL

(a) Premium income received from business concluded in and outside India shall be
separately disclosed.
(b) Reinsurance premiums whether on business ceded or accepted are to be brought into
account gross (i.e. before deducting commissions) under the head reinsurance premiums.
(c) Claims incurred shall comprise claims paid, specific claims settlement costs wherever
applicable and change in the outstanding provision for claims at the year-end,.
(d) Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or ` 5,00,000 whichever is higher, shall be shown as a separate line item.
(e) Fees and expenses connected with claims shall be included in claims.
(f) Under the sub-head "Others” shall be included items like foreign exchange gains or
losses and other items.
(g) Interest, dividends and rentals receivable in connection with an investment should be
stated as gross amount, the amount of income tax deducted at source being included
under 'advance taxes paid and taxes deducted at source”..
(h) Income from rent shall include only the realised rent. It shall not include any notional rent.
FORM B-BS
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
BALANCE SHEET AS AT 31ST MARCH, 20___.
Schedule Current Previous
Year Year
(`’000) (`’000)
Sources of Funds
Share Capital 5
Reserves and Surplus 6
Fair Value Change Account
Borrowings 7
Total
Application of Funds
Investments 8
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balances 11
Advances and Other Assets 12
Sub-Total (A)

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 Financial Statements of Insurance Companies 5.96

Current Liabilities 13
Provisions 14
Sub-Total (B)
Net Current Assets (C) = (A - B)
Miscellaneous Expenditure (To the extent not 15
written off or adjusted)
Debit Balance in Profit And Loss Account
Total
CONTINGENT LIABILITIES
Particulars Current Previous
Year Year
(`’000) (`’000)
1. Partly paid-up investments
2. Claims, other than against policies, not acknowledged as
debts by the company
3. Underwriting commitments outstanding (in respect of
shares and securities)
4. Guarantees given by or on behalf of the Company
5. Statutory demands/ liabilities in dispute, not provided for
6. Reinsurance obligations to the extent not provided for in
accounts
7. Others (to be specified)
TOTAL
SCHEDULES FORMING PART OF FINANCIAL STATEMENTS
SCHEDULE – 1
PREMIUM EARNED [NET]
Particulars Current Previous
Year Year
(`’000) (`’000)
Premium from direct business written
Add: Premium on reinsurance accepted
Less : Premium on reinsurance ceded
Net Premium
Adjustment for change in reserve for unexpired risks
Total Premium Earned (Net)
Note: Reinsurance premiums whether on business ceded or accepted are to be brought into
account, before deducting commission, under the head of reinsurance premiums.

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 5.97 Advanced Accounting

SCHEDULE – 2
CLAIMS INCURRED [NET]
Particulars Current Year Previous Year
(`’000) (`’000)
Claims paid
Direct
Add :Re-insurance accepted
Less :Re-insurance Ceded
Net Claims paid
Add Claims Outstanding at the end of the year
Less Claims Outstanding at the beginning
Total Claims Incurred
Notes:
(a) Incurred But Not Reported (IBNR), Incurred but not enough reported [IBNER] claims
should be included in the amount for outstanding claims.
(b) Claims includes specific claims settlement cost but not expenses of management
(c) The surveyor fees, legal and other expenses shall also form part of claims cost.
(d) Claims cost should be adjusted for estimated salvage value if there is a sufficient
certainty of its realisation.
SCHEDULE- 3
COMMISSION
Particulars Current Year Previous Year
(`’000) (`’000)
Commission paid
Direct
Add: Re-insurance Accepted
Less: Commission on Re-insurance Ceded
Net Commission
Note: The profit/ commission, if any, are to be combined with the Re-insurance accepted or
Re-insurance ceded figures.

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 Financial Statements of Insurance Companies 5.98

SCHEDULE – 4
OPERATING EXPENSES RELATED TO INSURANCE BUSINESS
Particulars Current Year Previous
Year
(`’000) (`’000)
1. Employees’ remuneration & welfare benefits
2. Travel, conveyance and vehicle running expenses
3. Training expenses
4. Rents, rates & taxes
5. Repairs
6. Printing & stationery
7. Communication
8. Legal & professional charges
9. Auditors' fees, expenses etc
(a) as auditor
(b) as adviser or in any other capacity, in
respect of
(i) Taxation matters
(ii) Insurance matters
(iii) Management services; and
(c) in any other capacity
10. Advertisement and publicity
11. Interest & Bank Charges
12. Others (to be specified)
13. Depreciation
TOTAL
Note: Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or `5,00,000 whichever is higher, shall be shown as a separate line item.
SCHEDULE – 5
SHARE CAPITAL
Particulars Current Previous
Year Year
(`’000) (`’000)
1. Authorised Capital
Equity Shares of `.... each
2. Issued Capital
Equity Shares of ` .....each

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 5.99 Advanced Accounting

3. Subscribed Capital
Equity Shares of `......each
4. Called-up Capital
Equity Shares of ` .....each
Less : Calls unpaid
Add : Equity Shares forfeited (Amount originally paid
up)
Less : Par Value of Equity Shares bought back
Less : Preliminary Expenses
Expenses including commission or brokerage
on
Underwriting or subscription of shares
TOTAL
Notes:
(a) Particulars of the different classes of capital should be separately stated.
(b) The amount capitalised on account of issue of bonus shares should be disclosed.
(c) In case any part of the capital is held by a holding company, the same should be
separately disclosed.
SCHEDULE – 5A
SHARE CAPITAL
PATTERN OF SHAREHOLDING
[As certified by the Management]
Shareholder Current Year Previous Year
Number of Number of
% of Holding % of Holding
Shares Shares
Promoters
• Indian
• Foreign
Others
TOTAL

SCHEDULE – 6
RESERVES AND SURPLUS
Particulars Current Year Previous Year
(`’000) (`’000)
1. Capital Reserve
2. Capital Redemption Reserve

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 Financial Statements of Insurance Companies 5.100

3 Share Premium
4 General Reserves
Less: Debit balance in Profit and Loss Account
Less: Amount utilized for Buy-back
5 Catastrophe Reserve
6 Other Reserves (to be specified)
7 Balance of Profit in Profit & Loss Account
TOTAL
Note: Additions to and deductions from the reserves should be disclosed under each of the
specified heads.
SCHEDULE - 7
BORROWINGS
Particulars Current Year Previous Year
(`’000) (`’000)
1. Debentures/ Bonds
2. Banks
3. Financial Institutions
4. Others (to be specified)
TOTAL
Notes:
(a) The extent to which the borrowings are secured shall be separately disclosed stating the
nature of the security under each sub-head.
(b) Amounts due within 12 months from the date of Balance Sheet should be shown
separately
SCHEDULE –8
INVESTMENTS
Particulars Current Previous
Year Year
(`’000) (`’000)
LONG TERM INVESTMENTS
1. Government securities and Government guaranteed
bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
( a) Shares
(aa) Equity

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 5.101 Advanced Accounting

(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
SHORT TERM INVESTMENTS
1. Government securities and Government guaranteed
bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(a) Derivative Instruments
(b) Debentures/ Bonds
(c) Other Securities (to be specified)
(d) Subsidiaries
(e) Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
TOTAL
Notes:
(a) Investments in subsidiary/holding companies, joint ventures and associates shall be
separately disclosed, at cost.
(i) Holding company and subsidiary shall be construed as defined in the Companies
Act, 1956:
(ii) Joint Venture is a contractual arrangement whereby two or more parties
undertake an economic activity, which is subject to joint control.
(iii) Joint control - is the contractually agreed sharing of power to govern the financial
and operating policies of an economic activity to obtain benefits from it.
(iv) Associate - is an enterprise in which the company has significant influence and
which is neither a subsidiary nor a joint venture of the company.

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 Financial Statements of Insurance Companies 5.102

(v) Significant influence (for the purpose of this schedule) - means participation in
the financial and operating policy decisions of a company, but not control of those
policies. Significant influence may be exercised in several ways, for example, by
representation on the board of directors, participation in the policymaking
process, material inter-company transactions, interchange of managerial
personnel or dependence on technical information. Significant influence may be
gained by share ownership, statute or agreement. As regards share ownership, if
an investor holds, directly or indirectly through subsidiaries, 20 percent or more of
the voting power of the investee, it is presumed that the investor does have
significant influence, unless it can be clearly demonstrated that this is not the
case. Conversely, if the investor holds, directly or indirectly through subsidiaries,
less than 20 percent of the voting power of the investee, it is presumed that the
investor does not have significant influence, unless such influence is clearly
demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
(b) Aggregate amount of company's investments other than listed equity securities and
derivative instruments and also the market value thereof shall be disclosed.
(c) Investments made out of Catastrophe reserve should be shown separately.
(d) Debt securities will be considered as “held to maturity” securities and will be measured at
historical cost subject to amortisation.
(e) Investment Property means a property [land or building or part of a building or both] held
to earn rental income or for capital appreciation or for both, rather than for use in
services or for administrative purposes.
(f) Investments maturing within twelve months from balance sheet date and investments
made with the specific intention to dispose of within twelve months from balance sheet
date shall be classified as short-term investments
SCHEDULE - 9
LOANS
Particulars Current Year Previous Year
(`’000) (`’000)
1. SECURITY-WISE CLASSIFICATION
Secured
(a) On mortgage of property
(aa) In India
(bb) Outside India
(b) On Shares, Bonds, Govt. Securities
(c) Others (to be specified)
Unsecured
TOTAL
2. BORROWER-WISE CLASSIFICATION

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 5.103 Advanced Accounting

(a) Central and State Governments

(b) Banks and Financial Institutions
(c) Subsidiaries
(d) Industrial Undertakings
(e) Others (to be specified)
TOTAL
3. PERFORMANCE-WISE CLASSIFICATION
(a) Loans classified as standard
(aa) In India
(bb) Outside India
(b) Non-performing loans less provisions
(aa) In India
(bb) Outside India
TOTAL
4. MATURITY-WISE CLASSIFICATION
(a) Short Term
(b) Long Term
TOTAL
Notes:
(a) Short-term loans shall include those, which are repayable within 12 months from the date
of balance sheet. Long term loans shall be the loans other than short-term loans.
(b) Provisions against non-performing loans shall be shown separately.
(c) The nature of the security in case of all long term secured loans shall be specified in
each case. Secured loans for the purposes of this schedule, means loans secured
wholly or partly against an asset of the company.
(d) Loans considered doubtful and the amount of provision created against such loans shall
be disclosed.
SCHEDULE – 10
FIXED ASSETS
(`’000)
Particulars Cost/ Gross Block Depreciation Net Block
Opening Additions Deductions Closing Upto For On Sales/ To As at Previous
Last The Adjustme Date year Year
Year Year nts end
Goodwill
Intangibles
(specify)
Land-
Freehold
Leasehold
Property
Buildings

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 Financial Statements of Insurance Companies 5.104

Furniture &
Fittings
Information
Technology
Equipment
Vehicles
Office
Equipment
Others
(Specify
nature)
TOTAL
Work in
progress
Grand Total
PREVIOUS
YEAR

Note: Assets included in land, building and property above exclude Investment Properties as
defined in note (e) to Schedule 8.
SCHEDULE- 11
CASH AND BANK BALANCES
Particulars Current Previous
Year Year
(`’000) (`’000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
(a) Deposit Accounts
(aa) Short-term (due within 12 months)
(bb) Others
(b) Current Accounts
(c) Others (to be specified)
3. Money at Call and Short Notice
(a) With Banks
(b) With other Institutions
4. Others (to be specified)
TOTAL
Balances with non-scheduled banks included in 2 and
3 above
Note : Bank balance may include remittances in transit. If so, the nature and amount should
be separately stated.

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 5.105 Advanced Accounting

SCHEDULE – 12
ADVANCES AND OTHER ASSETS
Particulars Current Previous
Year Year
(`’000) (`’000)
ADVANCES
1. Reserve deposits with ceding companies
2. Application money for investments
3. Prepayments
4. Advances to Directors/Officers
5. Advance tax paid and taxes deducted at source (Net
of provision for taxation)
6. Others (to be specified)
TOTAL (A)
OTHER ASSETS
1. Income accrued on investments
2. Outstanding Premiums
3. Agents’ Balances
4. Foreign Agencies Balances
5. Due from other entities carrying on insurance business
(including reinsures)
6. Due from subsidiaries/ holding
7. Deposit with Reserve Bank of India
[Pursuant to section 7 of Insurance Act, 1938]
8. Others (to be specified)
TOTAL (B)
TOTAL (A+B)
Notes:
(a) The items under the above heads shall not be shown net of provisions for doubtful
amounts. The amount of provision against each head should be shown separately.
(b) The term ‘officer’ should conform to the definition of that term as given under the
Companies Act, 1956.
(c) Sundry Debtors will be shown under item 9(others)
SCHEDULE – 13
CURRENT LIABILITIES
Particulars Current Year Previous Year
(`’000) (`’000)
1. Agents’ Balances
2. Balances due to other insurance companies
3. Deposits held on re-insurance ceded

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 Financial Statements of Insurance Companies 5.106

4. Premiums received in advance

5. Unallocated Premium
6. Sundry creditors
7. Due to subsidiaries/ holding company
8. Claims Outstanding
9. Due to Officers/ Directors
10. Others (to be specified)
TOTAL
SCHEDULE – 14
PROVISIONS
Particulars Current Previous
Year Year
(`’000) (`’000)
1 Reserve for Unexpired Risk
2 For taxation (less advance tax paid and taxes
deducted at source)
3 For proposed dividends
4 For dividend distribution tax
5 Others (to be specified)
TOTAL
SCHEDULE – 15
MISCELLANEOUS EXPENDITURE
(To the extent not written off or adjusted)
Particulars Current Year Previous Year
(`’000) (`’000)
1. Discount Allowed in issue of shares/ debentures
2. Others (to be specified)
TOTAL
Notes:
(a) No item shall be included under the head “Miscellaneous Expenditure” and carried
forward unless:
1. some benefit from the expenditure can reasonably be expected to be received in
future, and
2. the amount of such benefit is reasonably determinable.
(b) The amount to be carried forward in respect of any item included under the head
“Miscellaneous Expenditure” shall not exceed the expected future revenue/other benefits
related to the expenditure.

© The Institute of Chartered Accountants of India