Corporate Accounting Unit 9/12

Final Accounts

Financial statements, including the profit and loss statement and balance sheet, reflecting a company's financial performance and compliance with tax regulations.

Income Tax Act, 1961

A key tax provision that companies must adhere to when reconciling accounting profits with taxable income.

Companies Act, 2013

A legal framework that companies must follow to determine how profits can be distributed as dividends to shareholders.

Accounting Standard (AS) 22

Issued by the ICAI, this standard addresses the differences between accounting income and taxable income.

Accounting Income

The net profit before tax for a period, as shown in the profit and loss statement.

Taxable Income

The income on which tax is payable, calculated according to the provisions of the Income Tax Act, 1961, and associated rules.

Timing Differences

Temporary differences between accounting and taxable income that reverse over time.

Permanent Differences

Differences between accounting and taxable income that do not reverse in future periods.

Deferred Tax (DT)

The tax effect caused by timing differences, where the tax treatment of income or expenses differs between the accounting books and tax returns.

Deferred Tax Liability (DTL)

Arises when book profit is higher than taxable profit, leading to paying less tax now but more in the future.

Deferred Tax Asset (DTA)

Arises when book profit is lower than taxable profit, leading to paying more tax now but less in the future.

Provision for Income Tax

A provision created from the profits and shown as a 'below the line' entry, representing the estimated tax liability.

Advance Income Tax

Tax paid in advance as required by the Income Tax Act, shown on the 'Property & Assets' side of the balance sheet.

TDS Recoverable

Tax Deducted at Source from income like interest or commission; shown along with advance income tax on the 'Property & Assets' side of the balance sheet.

Dividend

A portion of a company's profits that is distributed to its shareholders.

Interim Dividend

A dividend declared by the Board of Directors between two annual general meetings.

Section 123 of the Companies Act

Specifies that a company can declare dividends from the profits of the year, previous years' profits, or funds guaranteed by the government.

Reserves

A portion of a company's profits that can be used to declare dividends if the company lacks sufficient profits in a particular year, subject to certain conditions.

Investor Education and Protection Fund

The fund to which dividends unpaid for 7 years are transferred, which promotes investor awareness.

Board of Directors' Recommendation

Dividends can only be declared based on the recommendation of the Board of Directors, who review financial statements and set the dividend rate.

Annual General Meeting (AGM)

The meeting where shareholders approve the dividend by passing a resolution.

Managerial Remuneration

Compensation provided to directors for managing the company's affairs.

Remuneration (Section 2(78))

Any money or its equivalent given to a person for services rendered, including perquisites as defined under the Income-tax Act, 1961.

Sitting Fee

Payment made to directors for attending Board or committee meetings.

Independent Director

A director who does not have a material or pecuniary relationship with the company, except for sitting fees, reimbursement of expenses, and profit-related commissions approved by the company members.

Insurance Premium

Payments made by a company on behalf of its managerial personnel for insurance policies, not included in managerial remuneration unless the individual is proven guilty of misconduct.

Professional Service

Services provided by a director that require specialized knowledge or skills; remuneration for such services is not included in managerial remuneration if the director possesses the necessary qualifications.

Guarantee Commission

A fee paid to a director for providing a financial guarantee on behalf of the company, which is not considered part of managerial remuneration.

Net Profits

The profits of a company after deducting all expenses, taxes, and other deductions, used as a basis for calculating managerial remuneration.

Schedule V

A schedule under the Companies Act that outlines the conditions and limits for paying remuneration to managerial personnel, particularly when a company has no profits or inadequate profits.

Nomination and Remuneration Committee

A committee of the Board of Directors responsible for determining and approving remuneration for directors and key managerial personnel, ensuring it is in line with the company's policy and legal limits.

Public Company

A company that has issued securities through an initial public offering (IPO) and is traded on at least one stock exchange; public companies are subject to more stringent regulatory and disclosure requirements.

Private Company

A company that is privately held, with shares that are not available to the public; private companies have fewer regulatory requirements compared to public companies, particularly in terms of managerial remuneration.

Depreciation

The systematic allocation of the cost of a tangible asset over its useful life, reflecting its wear and tear or obsolescence.

Capital Profit

Profits arising from the sale of fixed assets or investments, distinct from operational profits, and usually excluded when calculating managerial remuneration.

Provision for Taxation

An amount set aside from profits to cover tax liabilities, not included when calculating net profits for managerial remuneration.

Development Rebate Reserve

A reserve created by a company out of its profits to claim a tax deduction under certain conditions, often required by tax laws.

Commission

A percentage of the net profits paid to directors or managers as part of their remuneration, usually calculated after deducting all other payments.

Whole-time Director

A director who is in full-time employment with the company, often responsible for the daily operations and management.

Managing Director

A director who has substantial powers of management and is often the highest-ranking executive in the company, responsible for overall operations and management.

Effective Capital

Calculated as Paid-Up Share Capital + Share Premium Account + Reserves and Surplus + Long-Term Loans and Deposits - Investments - Accumulated Losses - Preliminary Expenses.

Financial Statements

Formal annual reports providing a comprehensive view of a company's financial health, performance, and cash flows, including the balance sheet, profit and loss statement, and cash flow statement.

Balance Sheet

A financial statement detailing a company's assets, liabilities, and shareholder equity at a specific point in time, providing a snapshot of what a company owns and owes.

Profit and Loss Statement

A financial document summarizing a company's revenues, costs, expenses, and profits or losses over a specific period, providing insight into the company's capacity to generate revenue and control costs.

Cash Flow Statement

Highlights the cash inflows and outflows from operating, investing, and financing activities.

Schedule III of Companies Act, 2013

Prescribes the format and requirements for presenting financial statements, including the Balance Sheet and Profit and Loss Statement, to ensure consistency, comparability, and compliance with Indian accounting standards.

Revenue from Operations

Includes sales of products, sales of services, and other operating revenues; for a finance company, includes income from interest, dividends, and other financial services.

Other Income

Includes interest income (for companies other than finance companies), dividend income, net gain/loss on the sale of investments, and other non-operating income.

Cost of Materials Consumed

Relevant to manufacturing companies; includes the cost of raw and other materials consumed in the production of goods.

Purchase of Stock-in-Trade

Refers to purchases of goods for trading purposes.

Changes in Inventories

The difference between the opening and closing inventories of finished goods, Work-in-Progress (WIP), and stock-in-trade.

Employee Benefit Expenses

Costs incurred on salaries, wages, leave encashment, and staff welfare, categorized into direct and indirect expenses.

Finance Cost

Interest charges on borrowings for the year; only interest costs are included here.

Depreciation

Reflects the reduction in the value of fixed assets.

Amortization

Pertains to the writing off of intangible assets.

Long-Term Borrowings

Should be classified under Bonds/Debentures, Term loans, Deferred payment liabilities, Deposits, Long-term maturities of finance lease obligations, Loans and advances from related parties, Other loans and advances.

Tangible Assets

Should be classified as Land, Buildings, Plant and Equipment, Furniture and Fixtures, Vehicles, Office equipment, Others.

Intangible Assets

Should be classified as Goodwill, Brands/Trademarks, Computer Software, Mining Rights, Publishing Titles, Copyrights, Patents, Licenses and Franchises, Recipes, Others.

Inventories

Should be classified as: Raw materials, Work-in-progress, Stores and spares, Finished goods, Loose tools, Stock in trade, Goods in transit, Others

Valuation (in finance)

The process undertaken to assess the worth of a particular asset.

Price (in finance)

The amount which is negotiated between a willing buyer and a willing seller for an asset.

Valuation of shares

The process of knowing the value of a company’s shares, done based on quantitative techniques, influenced by market demand and supply.

Net Asset Method

A valuation method that represents the value of the business with reference to the asset base of the entity and the corresponding liabilities on the valuation date.

Income-based approach (share valuation)

An approach that focuses on the expected benefits from the business investment i.e. what the business generates in the future when valuation is done for a small number of shares.

Yield Method

A method to valuing shares based on the expected earnings or returns that the shares are likely to generate.

Discounted Cash Flow (DCF) Method

A valuation Method that values the business by discounting its free cash flows for the explicit forecast period and the perpetuity value thereafter.

Weighted Average Cost of Capital (WACC)

An appropriate rate of discount to calculate the present value of the cash flows as it considers equity-business risk and the debt-equity ratio of the company

Earnings Capitalisation Method

A method used while valuing a going concern business with a good profitability history that involves determining the future maintainable earning level of the entity from its normal operations.

EV/EBIDTA Multiple Method

A method that compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to compare the relative value of different businesses.

Comparable Transaction Method

A method that looks for similar or comparable past transactions in which the company targeted for acquisition has either a similar business model or is of similar size to determine a company’s value.

Market Price Method

A method that evaluates the value on the basis of prices quoted on the stock exchange.

Beta

The sensitivity of a particular stock vis-a-vis Market or Index.

Equity Risk Premium

The expectation of the investor over and above the risk free return. (= Market Return – Risk Rate Return)

Free Cash Flow to Firm (FCFF)

Method involves discounting projected free cash flow to firm (FCFF) at the weighted average cost of the capital (WACC) to find a company's total value (i.e. sum of its equity and debt).

Capitalization Rate

The rate used to convert an estimate of future benefits into an indication of value

Net Operating Income (NOI)

Income – Operating Expenses