ISSUE AND

REDEMPTION
OF
DEBENTURES
 PART I
ISSUE OF
DEBENTURES
 MEANING OF DEBENTURES

▪ When Loan form public is divided into small unit of fixed amount, then
each such unit is called Debenture.

▪ Example: A Ltd want to raise loan from public for Rs. 10,00,000 which
is divided into 10,000 Debentures of Rs. 100 each.

▪ Document which is issued which acknowledge the loan taken from

public is called Debenture certificate.

▪ Debenture certificate includes Face value, rate of Interest, period of

payment, redemption value and date etc.

TYPES OF DEBENTURES

ON THE BASIS ON THE BASIS ON THE

ON THE BASIS OF
OF SECURITY OF BASIS OF
REPAYMENT
TRANSFERABILITY
AND PRIORITY CONVERSION

ON THE BASIS OF SECURITY

Naked debentures Mortgage debentures

Naked debentures are those

which do not carry any charge
on the assets of the company.
The holders of such Debentures which are secured by
debentures are not given any mortgage or charge on assets.
security as to the payment of
interest and repayment of
capital.

ON THE BASIS OF PRIORITY

FIRST DEBENTURES SECOND DEBENTURES

These debentures have

priority over other debentures These debentures are repaid after
as regard payment out of the the claims of the first
proceeds of the property debentures have been met.
mortgaged.
 ON THE BASIS OF REPAYMENT

REDEEMABLE IRREDEEMABLE

In the case of irredeemable or

perpetual debentures the
company does not give any
undertaking of repaying
debentures, after a fixed term
▪ In this case, Debenture amount is or within a fixed period during
returned to holders after a certain the continuance of business
period. by the company. Company
▪ Redemption can be at par, may repay debentures at any
premium or at discount. Time but the creditors cannot
compel the company to repay
them at any certain time.
They shall, however, be repaid
when the company goes into
liquidation or makes a default
in the payment of interest.

ON THE BASIS OF TRANSFERABILITY

REGESTERED BEARER DEBENTURES

Registered debentures are

made out in the name of a
particular person, who is
Bearer debentures are treated
registered as a debenture-
as negotiable instruments and
holder in the books of the
are transferable by delivery
company. The names of the
alone. The names of the
debenture-holder are recorded
holders of such debentures
in the company's register of
are not required to be
debentures holders They are
registered in the register of
transferable in the same way
debenture-holders.
as shares or in accordance
with the conditions endorsed
on their back.
 ON THE BASIS OF CONVERSION

CONVERTIBLE NON CONVERTIBLE

In this case, Debenture In this case, Debenture

holders have right to convert holders have No right to
Debentures into equity convert Debenture into
shares after a certain period equity shares

ISSUE OF DEBENTURES

ISSUE OF ISSUE OF ISSUE OF

DEBENTURES AT DEBENTURES AT DEBENTURES AT
PAR PREMIUM DISCOUNT

ISSUE OF DEBENTURES AT PAR

Journal Entries (Face Value of Rs. 100)

Particulars Dr. (Rs.) Cr. (Rs.)

(a) When Application money received:
Bank a/c Dr.
To Debenture Application a/c
(Being Application money received)
(b) When Debenture Allotted
Debenture Application a/c Dr.
To Debenture a/c
(Being Amount transferred)
EXAMPLE 1:
A Ltd Issued 10,000 10% Debenture of Rs. 100 payable entire amount
with application. Pass Journal Entries.

ISSUE OF DEBENTURES AT PREMIUM

Journal Entries (Face Value of Rs. 100, ISSUE PRICE 120)

Particulars Dr. (Rs.) Cr. (Rs.)

(a) When Application money received:
Bank a/c Dr.
To Debenture Application a/c
(Being Application money received)
(b) When Debenture Allotted
Debenture Application a/c Dr.
To Debenture a/c
To Securities Premium
(Being Amount transferred)
EXAMPLE 2:
A Ltd Issued 10,000 10% Debenture of Rs. 100 issued at Rs. 120 per
shares payable entire amount with application. Pass Journal Entries.

ISSUE OF DEBENTURES AT DISCOUNT

Journal Entries (Face Value of Rs. 100, Issued at Rs. 90)

Particulars Dr. (Rs.) Cr. (Rs.)

(a) When Application money received:
Bank a/c Dr.
To Debenture Application a/c
(Being Application money received)
(b) When Debenture Allotted
Debenture Application a/c Dr.
Discount on Issue of deb Dr.
To Debenture a/c
(Being Amount transferred)
EXAMPLE 3:
A Ltd Issued 10,000 10% Debenture of Rs. 100 each issued at 90%
payable entire amount with application. Pass Journal Entries.

Note:
If Question require to receive amount on issue of debentures in
installment i.e. on application, allotment, calls etc., then entries will be
made in the same way as in case of Issue of shares

When Debentures are redeemable at Premium, then we have to pass an

Additional Entry at time of issue of Debentures in which we will
recognize Premium payable on Redemption as liability along with Loss
on issue of Debentures and such entry will be:

Loss on Issue of Debenture a/c Dr.

To Premium Payable on Redemption a/c
(Being Premium payable on redemption recognized)

EXAMPLE 4:
A Ltd Issued 20,000 10% Debenture of Rs. 100 each issued at 90%
payable entire amount with application such debentures are redeemable
at 20% Premium after 5 years. Pass Journal Entries.
 HOW TO WRITE OFF DISCOUNT / LOSS ON ISSUE OF
DEBENTURES

Discount or Loss on Issue of Debentures will be written off at the end of

each year in the ratio of Amount of debenture outstanding at the end of
each year over the period of redemption.

Entry for Discount written off will be as under:

P&L a/c Dr.
To Discount/Loss on Issue of Debenture a/c

HOW TO CALACULATE RATIO FOR WRITE OFF

WHEN DEBENTURES ARE WHEN DEBENTURES ARE

REDEEMABLE AFTER A CERTAIN REDEEMABLE IN
PERIOD INSTALLMENTS

In this case, Amount used by

company will be equal in each year, In this case, Amount used by
so discount written off each year company will be different in
will also be equal each year each year, so discount written
off each year will be written
Discount w/o = off in each year in the ratio of
Total Discount Amount used.
Redemption period

EXAMPLE 5:
A Ltd Issued 20,000 10% Debenture of Rs. 100 each issued at 90% on
01-01-2020. Such Debentures are redeemable after 5 years in Lumpsum.
Calculate Discount written off each year. Accounts are closed on 31st
December each year.

EXAMPLE 6:
A Ltd Issued 50,000 10% Debenture of Rs. 100 each issued at 12%
Discount on 01-04-2018. Such Debentures are redeemable in 5 equal
installments starting from 31-03-2019. Calculate Discount written off
each year. Accounts are closed on 31st March each year.

EXAMPLE 7:
A Ltd Issued 20,000 10% Debenture of Rs. 100 each issued at 18%
Discount on 01-04-2020. Such Debentures are redeemable in 5 equal
installments starting from 31-03-2022. Calculate Discount written off
.each year. Accounts are closed on 31st March each year.
 ISSUE OF DEBENTURES AS COLLETRAL SECURITY

▪ When a company takes loan from bank or from financial institutions

and as a security for such loan, company gives its Debentures to Bank
in addition to any other security already given, it is called Issue of
Debentures as collateral security.

▪ When company repaid its loan, then such debentures will be return
back by bank to company.

ACCOUNTING FOR ISSUE OF DEBENTURES AS

COLLETRAL SECURITY
CASE 1 – NO ENTRY PASSED BY COMPANY

▪ When company not passed entry for issue of such Debentures, then
Only disclosure is given in notes to Account along with Loan stating
that such loan is secured by issue of Debentures as collateral security

CASE 2 – WHEN ENTRY IS PASSED BY COMPANY

▪ In this case, Company has passed Entry for issue of Debentures as

collateral security as under:
Debentures Suspense a/c Dr.
To Debentures a/c
(Being Debentures are issued as Collateral Security)

▪ Debentures will be shown in Non Current Liabilities in Balance sheet

▪ Debenture Suspense a/c will be shown in Asset side of Balance sheet
under Non current Assets or it may be shown as deduction from
Debentures in Non current Liabilities.

When Loan is repaid and Debentures are return back, above entry will be
reversed.
EXAMPLE 10:
A Ltd has taken a Loan of Rs. 20,00,000 from State bank of India which
is secured against Land & Building. In addition to Building, Company
Issued 20,000 Debentures of Rs. 100 each as collateral Security. What
will be Accounting Treatment for Issue of Debentures in following
Cases:

Case 1 - when No Entry is Passed

Extracts of Balance Sheet

Liabilities Notes Amounts (Rs.)

I – EQUITY AND LIABILITIES

2. Non Current Liabilities
Loan from SBI 20,00,000
Total

II – ASSETS

Total

Notes to Accounts
Non Current Liabilities
Loan from SBI (Secured against L&B) 20,00,000
(Also secured by issue of 20,000 Debentures of Rs. 100 each)

Case 2 – when Entry is Passed

Debentures Suspense a/c Dr.

To Debentures a/c
(Being 20,000 Debentures of Rs. 100 are issued as Collateral Security)

Extracts of Balance Sheet

Liabilities Notes Amounts

(Rs.)
I – EQUITY AND LIABILITIES

2. Non Current Liabilities

Loan from SBI 20,00,000
Debentures 20,00,000
Total

II – ASSETS
Non Current Assets
Other Non current Assets
Debenture Suspense a/c 20,00,000
Total
 Notes to Accounts
Non Current Liabilities
Loan from SBI (Secured against L&B) 20,00,000
(Also secured by issue of 20,000 Debentures of Rs. 100 each)
Debentures 20,00,000
(Issued as Collateral Security)

DEBENTURE INTEREST

▪ Company is Liable to pay Interest to debenture holders as per the

term & conditions.

▪ Debenture Interest is expenses for company and it is a charge against

profit.

▪ Company is liable to deduct TDS from the Interest and such TDS is
paid to Government.

ACCOUNTING FOR DEBENTURE INTEREST

When Interest Due

Debentures Interest a/c Dr.

To TDS Payable
To Debenture holders a/c
(Being Debenture Interest due)

When Amoun Paid

TDS Payable a/c Dr.

Debenture holders a/c Dr.
To Bank a/c
(Being Amount Paid)

EXAMPLE 11:
A Ltd has 10,000 15% Debentures of Rs. 100 each on 01-04-23. Interest
is payable half yearly on 30th Sep and 31st March each year. TDS is 10%.
Pass JE
 PART II
REDEMPTION
OF
DEBENTURES
 REDEMPTION OF DEBENTURES
When company repaid the amount of debentures to Debenturholders,
then it is called Redemption of Debentures.

SOURCES OF REDEMPTION

WHEN REDEMPTION IS MADE OUT WHEN REDEMPTION IS MADE

OF CAPITAL OUT OF PROFIT

In this case, Redemption is made In this case, Redemption is

out of Capital i.e. out of issue of made out of profit earned by
fresh issue of capital, existing or company either in past or in
fresh loan etc. current year.

Journal Entries when Redemption is out of Capital

▪ When Redemption Due

Debentures a/c Dr.
Redemption of Debentures a/c Dr.
To Debenture holders a/c

▪ When Amount paid

Debentures Holders a/c Dr.
To Bank a/c

Note:
When redemption is out of profit, then in addition to above two entries,
one additional entry is also passed in which an amount equal to face
value of debenture redeemed will be transferred to from profit & Loss
a/c to General Reserve.

Profit & Loss a/c Dr.

To General Reserve a/c

EXAMPLE 1
A Ltd has 10,000 15% Debentures of Rs. 100 each on 01-04-23. Now
company redeemed such debentures at 20% Premium. Pass JE in
following cases:
Case I – When Redemption is out of capital
Case II – When Redemption is out of Profit
 METHODS OF REDEMPTION

REDEMPTION BY
REDEMPTION IN CASH
CONVERSION

REDEMPTION IN REDEMPTION IN
LUMPSUM INSTALLEMENT

DRAWING BY OPEN MARKET

LOTS OPERATION

REDEMPTION IN CASH

REDEMPTION IN INSTALLEMENT

DRAWING BY LOTS OPEN MARKET OPERATION

▪ Under this case, own

debentures are purchased and
▪ This is a Lottery system
such debentures are cancelled
with existing debentures
▪ In this case, normal entries
Liabilities.
for redemptions are passed
as and when redemption is
▪ Any Gain on cancellation will
made.
be transferred to Capital
Reserve a/c
 ACCOUNTING FOR OPEN MARKET OPERATION

Journal Entries

▪ When Dentures are purchased from open market

Own Debentures a/c Dr. (Cost of Debentures)
Interest on Debentures a/c Dr. (Interest up to date of purchase)
To Bank a/c

▪ When Debentures are cancelled

Debentures a/c Dr. (Face value of debentures)
To Own Debentures a/c (Cost of Debentures)
To Capital Reserve a/c ( Profit on cancellation)

Note:
When redemption is out of profit, then in addition to above two
entries, one additional entry is also passed in which an amount
equal to face value of debenture redeemed will be transferred to
from profit & Loss a/c to General Reserve.

Profit & Loss a/c Dr.

To General Reserve a/c

QUOTATION PRICE FOR PURCHASE CAN BE

CUM- INTEREST
EX- INTEREST

In this types of price

In this types of price
quotation, Price paid for
quotation, Price paid for
Debentures are Inclusive
Debentures are exclusive
of Interest. Means
of Interest. Means
interest up to the date of
interest up to the date of
purchase are not paid
purchase are paid
separately. It is included
separately
in price quotation

Note:
if nothing specified, then we will assume price quotation is Ex-
Interest price quotation.
EXAMPLE 2
A Ltd has 12,000 15% Debentures of Rs. 100 each on 01-04-23. Now
company redeemed such debentures at par in 3 equal Annual
Installment starting from 31-03-24. Pass JEs in all 3 years.

EXAMPLE 3
A Ltd has 20,000 18% Debentures of Rs. 100 each on 01-04-23. interest
is paid on 30th Sep and 31st March every year.
company purchased following own debentures from open market for
immediate cancellation:
▪ 4,000 Debentures @ Rs. 96 Ex – Interest on 1-06-23
▪ 3,000 debentures @ Rs. 99 Cum – Interest on 31st December 23

Pass JEs

WHEN OWN DEBENTURES ARE PURCHASED FROM

OPEN MARKET BUT NOT CANCELLED IMMEDIETELY BUT
CANCELLED AT A LATER DATE

In this case, on each Interest payment date, interest on own

debenture will be recognized as saving in interest until the
debentures are cancelled.

Following entry for interest is passed in this case:

Interest on Debentures a/c Dr. (Total Interest)
To Bank a/c (Interest on debentures paid to outsiders)
To Interest on own Debentures a/c

EXAMPLE 4
A Ltd has 30,000 12% Debentures of Rs. 100 each on 01-04-23. interest
is paid on 30th Sep and 31st March every year.
company purchased following own debentures from open market:
▪ 6,000 Debentures @ Rs. 97 Ex – Interest on 1-06-23
▪ 4,000 debentures @ Rs. 99 Cum – Interest on 01-12-23
▪ 3,000 debentures @ Rs. 95 Cum – Interest on 01-02-24

All the debentures were cancelled on 31st March 2024

Pass JEs
 REDEMPTION IN LUMPSUM
SINKING FUND METHOD

▪ Under this method, The company sets aside a certain amount of

money each period (often annually) into a sinking fund. This fund is
specifically earmarked for the eventual redemption of the debentures.

▪ The money in the sinking fund is usually invested in safe and liquid
investments such as government securities or bonds, which earn
interest.

▪ When the debentures mature, instead of redeeming them directly from

the company's resources, the company uses the money accumulated
in the sinking fund (including the interest earned on investments) to
redeem the debentures.

Journal Entries under sinking fund method

1st Year – End of the year

▪ When amount set aside out of profit
P&L Dr.
To Sinking Fund a/c

(Amount set aside for each year is calculated after considering

Redemption amount, period of redemption and Interest rate on sinking
fund Investments)

▪ When Sinking fund Investments are purchased

Sinking Fund Investments a/c Dr.
To Bank
(with the amount equal to set aside out of profit)

At the end of 2nd Year & onward except Last year

▪ When Interest on Investment received
Bank a/c Dr.
To Interest on Sinking Fund Investment a/c

▪ When Interest Transferred

Interest on Sinking Fund Investment a/c Dr.
To Sinking Fund a/c
OR

▪ Direct entry can be passed for Interest

Bank a/c Dr.
To Sinking Fund a/c
(With Interest Amount)
▪ When amount set aside out of profit
P&L Dr.
To Sinking Fund a/c

▪ When Sinking fund Investments are purchased

Sinking Fund Investments a/c Dr.
To Bank
(with the amount equal to set aside out of profit + Interest rec.)

Note:
If sinking fund is non cumulative, then Interest on S.F Investments will
be transferred to P&L and not reinvested.

In the Last Year

▪ When Interest on Investment received
Bank a/c Dr.
To Sinking Fund a/c

▪ When Investments are sold

Bank a/c Dr.
To Sinking Fund Investments a/c
(With Amount of Sale Proceeds)
Note:
Any profit or loss on sale of investments will be transferred to sinking
fund a/c

▪ When Debentures are due for redemption

Debentures a/c Dr. (Face Value)
Premium on Redemption a/c Dr. (Premium Amount)
To Debenture Holders a/c

▪ When Amount paid

Debenture Holders a/c Dr.
To Bank a/c

▪ Premium on Redemption will be written off against Sinking fund

Sinking Fund a/c Dr.
To Premium on Redemption a/c

▪ After redemption, Amount equal to face value of redemption will be

transferred from sinking fund a/c to General Reserve a/c
Sinking Fund a/c Dr.
To General Reserve a/c

Note:
In Last year, Balancing figure in Sinking fund a/c will be taken as
amount set aside out of profit
EXAMPLE 5
P Ltd. issued Rs. 30,00,000, 10% debentures on January 1, 2021. These
were to be redeemed on 31st December, 2023. For this purpose, the
company established Sinking Fund. Investments were expected to earn
5% interest p.a. Sinking Fund table shows that 0.317208 invested
annually at 5% amount to Rs. 1 in 3 years. On 31st December, 2023 the
investment was sold for Rs. 1968,000. Interest received and
investments are made in multiples of Rs. 100. Prepare Accounts
 REDEMPTION BY CONVERSION

▪ When Debentures are converted into equity shares or Preference

shares or New Debentures, then it is known as Redemption by
conversion

▪ In this case number shares issued are calculated as under:

Amount payable to Debenture holders
Issue price

Journal Entries

▪ When Debentures are due for redemption

Debentures a/c Dr. (Face Value)
Premium on Redemption a/c Dr. (Premium Amount)
To Debenture Holders a/c

▪ When Shares/Debentures are Issued

Debenture Holders a/c Dr.
To Share Capital a/c
To Securities Premium a/c
To Debentures a/c
(with the amount equal to set aside out of profit)

Note:
If there is fraction in calculation of shares or Debentures, then fraction
will be paid in cash.

EXAMPLE 6
A Ltd had 12,500 Debentures of Rs. 100 which are redeemable at 10%
Premium. Holders of Debentures also given an option to convert their
debentures into equity shares of Rs 10 each at Rs. 15 per shares.
60% Debenture holders accepted the offer of conversion and rest take
cash. Pass Journal Entries.
 RATIO
ANALYSIS
 MEANING OF RATIOS ANALYSIS

It refers to the systematic use of ratios to interpret the financial

statements in terms of the operating performance and financial
position of a firm. It involves comparison for a meaningful
interpretation of the financial statements.

VAROIUS TYPES OF RATIO

Solvency or
Liquidity Turnover Profitability
Leverage
Ratio Ratio ratios
ratios

1. LIQUIDITY RATIO

▪ It measures the ability of the firm to meet its short-term obligations,

that is capacity of the firm to pay its current liabilities as and when
they fall due.

▪ These ratios reflect the short-term financial solvency of a firm.

▪ A firm should ensure that it does not suffer from lack of liquidity.

▪ The various ratios that explains about the liquidity of the firm are:
1. Current Ratio
2. Acid Test Ratio / quick ratio
3. Absolute liquid ration / cash ratio

CURRENT RATIO

▪ The current ratio measures the short-term solvency of the firm.

▪ It establishes the relationship between current assets and current
liabilities.
▪ It is calculated by dividing current assets by current liabilities as
under

Current Ratio = Current Asset

Current Liabilities
 CURRENT ASSETS AND CUURENT LIABILITIES
INCLUDES

Current assets include:

▪ Cash and bank balances
▪ Short Term Investments (Marketable securities)
▪ Inventory
▪ Debtors (excluding provisions for bad debts and doubtful debtors)
▪ Bills receivables
▪ Prepaid expenses.

Current liabilities includes

▪ Sundry creditors
▪ Bills payable,
▪ Short - term loans
▪ Income-tax liability
▪ Accrued expenses
▪ Dividends payable.

LIQUID RATIO

▪ This Ratio is also called Quick Ratio and Acid Test Ratio

▪ It has been an important indicator of the firm’s liquidity position and

is used as a complementary ratio to the current ratio.

▪ It establishes the relationship between quick assets and current

liabilities.

▪ It is calculated by dividing quick assets by the current liabilities.

Acid Test Ratio = Quick /Liquid Assets

Current liabilities

Quick /Liquid Assets = Current Assets – Stock – Prepaid Expenses –

Advanced Tax

CASH RATIO/ ABSOLUTE LIQUID RATIO

It shows the relationship between absolute liquid or super quick

current assets and liabilities. Absolute liquid assets include cash,
bank balances, and marketable securities.

Absolute liquid ratio = Absolute liquid assets

Current liabilities

Absolute Liquid Assets = Cash + Bank + Marketable Securities

(Market value of non trade Invest)
Example 1
Inventories 50,000 Trade receivables 50,000 Advance tax 4,000 Cash
and cash equivalents 30,000 Trade payables 1,00,000 Short-term
borrowings (bank overdraft) 4,000
Calculate Current Ratio and Quik Ratio and Cash Ratio

Example 2
X Ltd., has a current ratio of 3.5:1 and quick ratio of 2:1. If excess of
current assets over quick assets represented by inventories is Rs.
24,000, calculate current assets and current liabilities.

2. SOLVENCY RATIO/ LEVERAGE RATIO

▪ The solvency or leverage ratios throws light on the long-term

solvency of a firm

▪ These Ratios reflect firms' ability to assure the long term creditors
with regard to periodic payment of interest during the period and
loan repayment of principal on maturity.

▪ These ratios explain

a. Ability to repay the principal amount as and when due
b. Regular payment of the interest.

▪ Solvency ratios generally Includes following:

1. Debt equity ratio
2. Debt to total Assets ratio
3. Proprietary ratio
4. Interest coverage Ratio
5. Fixed charge coverage ratio
6. Capital Gearing Ratio

DEBT-EQUITY RATIO

▪ Debt equity ratio shows the relative claims of Long term creditors
and Shareholders fund (Equity).
▪ Thus this ratio indicates the relative proportions of debt and equity
in financing the firm’s assets.
▪ It can be calculated by dividing Debt by shareholder funds (Equity)
▪ Ideal Ratio id 2:1

Debt equity ratio = Total Debts

Shareholder Funds or Equity
Total Debts includes long-term debts only.
The shareholder funds include
▪ Equity share capital
▪ Preference share capital
▪ Reserves and surplus including accumulated profits.

However fictitious assets like accumulated losses and deferred

expenses etc. should be deducted from the total of these items to
arrive at shareholder funds.

The shareholder funds so calculated are known as net worth of the

business.

DEBT TO TOTAL ASSETS RATIO

▪ This ratio show the share of Debts in Total Assets of the Firm
▪ It is calculated as under

Debt equity ratio = Total Debts

Total Assets

Total Debts includes long-term debts only.

The Assets do not includes Fictitious Assets

CAPITAL GEARING RATIO

▪ This ratio show the share of Relation of Fixed Capital with equity
shareholders fund

Debt equity ratio = Total Debts + PSC

shareholder's Equity shareholders fund

Equity Shareholders fund = ESC + R&S

Example 3
ES Capital 15,00,000
PS Capital 6,00,000
Reserve & Surplus 4,00,000
Long Term Debts 13,50,000
Current Liabilities 4,50,000

Calculate:
(i) Debt – Equity Ratio
(ii) Debts to Total Assets Ratio
(iii) Capital Gearing Ratio
 INTEREST COVERAGE RATIO

This shows the number of times the earnings of the firms are able to
cover the fixed interest liability of the firm. This ratio therefore is also
known as Interest coverage or time interest earned ratio. It is
calculated by dividing the earnings before interest and tax (EBIT) by
interest charges on loans.

Debt Service Ratio = Earnings before interest and tax (EBIT)

Interest Charges

Example 4
From the following details, calculate interest coverage ratio: Net Profit
after tax Rs. 60,000; 15% Long term debt 10,00,000; and Tax rate 40%.

DEBTS SERVICE COVERAGE RATIO

This ratio shows how many times the cash flow before interest and
taxes covers Interest and Repayment of Loan. It is defined as:
Profit before interest and taxes + Depreciation
Repayment of loan Installment + Interest

Example 5
From the following details, calculate interest coverage ratio: and Debts
service coverage Ratio. Net Profit after tax Rs. 1,00,000; 15% Long
term debt 10,00,000 repayable in 20 Installments; Depreciation Rs.
1,50,000 and Tax rate 40%.

FIXED CHARGE SERVICE COVERAGE RATIO

This ratio shows how many times the cash flow before interest and
taxes covers all fixed financing charges. It is defined as:

Profit after tax +Depreciation +Other non-cash charges

Interest on term loan + Lease rentals
Interest on term loan + Lease rentals + Repayment of term loan

Example 6
Company A records EAT of Rs. 300,000, operating lease payments of
Rs. 200,000, and Rs. 50,000 in interest expense. Calculate Fixed
Charges Coverage Ratio.
 INTEREST COVERAGE RATIO

This shows the number of times the earnings of the firms are able to
cover the fixed interest liability of the firm. This ratio therefore is also
known as Interest coverage or time interest earned ratio. It is
calculated by dividing the earnings before interest and tax (EBIT) by
interest charges on loans.

Debt Service Ratio = Earnings before interest and tax (EBIT)

Interest Charges

Example 4
From the following details, calculate interest coverage ratio: Net Profit
after tax Rs. 60,000; 15% Long term debt 10,00,000; and Tax rate 40%.

DEBTS SERVICE COVERAGE RATIO

This ratio shows how many times the cash flow before interest and
taxes covers Interest and Repayment of Loan. It is defined as:
Profit before interest and taxes + Depreciation
Repayment of loan Installment + Interest

Example 5
From the following details, calculate interest coverage ratio: and Debts
service coverage Ratio. Net Profit after tax Rs. 1,00,000; 15% Long
term debt 10,00,000 repayable in 20 Installments; Depreciation Rs.
1,50,000 and Tax rate 40%.

FIXED CHARGE SERVICE COVERAGE RATIO

This ratio shows how many times the cash flow before interest and
taxes covers all fixed financing charges. It is defined as:

Profit after tax +Depreciation +Other non-cash charges

Interest on term loan + Lease rentals
Interest on term loan + Lease rentals + Repayment of term loan

Example 6
Company A records EAT of Rs. 300,000, operating lease payments of
Rs. 200,000, and Rs. 50,000 in interest expense. Calculate Fixed
Charges Coverage Ratio.
 3. TURNOVER RATIO/ ACTIVITY RATIO

Turnover ratios are also known as activity ratios or efficiency ratios

with which a firm manages its Operations. The following turnover
ratios can be calculated to judge the effectiveness of asset use.

1. Inventory Turnover Ratio

2. Debtor Turnover Ratio
3. Creditor Turnover Ratio
4. Assets Turnover Ratio

INVENTORY TURNOVER RATIO

This ratio indicates the number of times the inventory has been
converted into sales during the period. Thus it evaluates the efficiency
of the firm in managing its inventory. It is calculated by dividing the
cost of goods sold by average inventory.

Inventory Turnover Ratio = Cost of goods sold

Average Inventory

The average inventory is simple average of the opening and closing

balances of inventory. (Opening + Closing balances / 2).

In certain circumstances opening balance of the inventory may not be

known then closing balance of inventory may be considered as
average inventory

Cost of Goods sold =

Opening stock + Purchase + Direct Expenses – Closing Stock
or

Sales - GP

Example 7
From the following information, calculate inventory turnover ratio :

Inventory in the beginning = 18,000 Inventory at the end = 22,000

Net purchases = 46,000 Wages = 14,000
Revenue from operations = 80,000 Carriage inwards = 4,000

Example 8
From the following information, calculate inventory turnover ratio :

Revenue from Operation 4,00,000

Average Inventory 55,000
GP Ratio 10%
 DEBTORS TURNOVER RATIO

This indicates the number of times average debtors have been

converted into cash during a year. It is determined by dividing the net
credit sales by average debtors.

Debtor Turnover Ratio = Net Credit Sales

Average Trade Debtors

Net credit sales consist of gross credit sales minus sales return.
Trade debtor includes sundry debtors and bill’s receivables. Average
trade debtors (Opening + Closing balances / 2)

When the information about credit sales, opening and closing balances
of trade debtors is not available then the ratio can be calculated by
dividing total sales by closing balances of trade debtor

Debtor Turnover Ratio = Total Sales

Trade Debtors

Average collection period = 365/12

DTR

Example 9
Calculate the Trade receivables turnover ratio and Average collection
period:
Total Revenue from operations 4,00,000
Cash Revenue from operations 20% of Total Revenue from operations
Trade receivables as at 1.4.2021 40,000
Trade receivables as at 31.3.2022 1,20,000

FIXED ASSETS TURNOVER RATIO

This ratio measures sales per rupee of investment in fixed assets. It is

defined as:
Fixed Assets Turnover Ratio = Net Sales
Average Fixed Assets

TOTAL ASSETS TURNOVER RATIO

Total Assets Turnover: the total assets turnover is defined as:

Assets Turnover Ratio = Net Sales
Average Total Assets

This ratio measures how efficiently assets are employed, overall.

 4. PROFITABILITY RATIO

GROSS PROFIT RATIO

It measures the relationship between gross profit and sales. It is
calculated by dividing gross profit by sales.
Gross profit margin or ratio = Gross profit X 100
Net sales

Gross profit is the difference between sales and cost of goods sold.

OPERATING PROFIT RATIO

It measures the relationship between Operating profit and sales. It is
calculated by dividing EBIT profit by sales.
EBIT X 100
Net sales

EBIT = Net Sales – Operating cost

Operating Cost = Cost of Goods sold + Operating Expenses
All Expenses other than Interest are Operating Expenses

OPERATING RATIO
It measures the relationship between Operating cost and sales. It is
calculated by dividing operating cost by sales.
operating cost X 100
Net sales

Operating ratio may also be calculated as under:

100 – Operating profit ratio

EBITDA Margin
The EBITDA margin is defined as
EBITDA X 100
Net sales

EBITDA = Earning before Interest Tax, Depreciation and Amortization

NET PROFIT RATIO

It measures the relationship between Net profit and sales.
It is calculated by dividing gross profit by sales.
Net profit margin or ratio = Net profit X 100
Net sales
 5. PROFITABILITY RATIO BASED ON OVERALL RETURN
ON INVESTMENTS

Return on Capital Employed / on Investment (ROCE/ROI)

Before Tax= EBIT
Capital Employed

After Tax= EBIT X (1 – tax)

Capital Employed

Capital Employed =
F 1 = Total Assets – Current Liabilities
F 2 = Share capital + R&S + Long Term Debts – Accumulated Losses

Return on Assets (ROA)

The return on assets (ROA) is defined as:

Before Tax= EBT

Total Assets

After Tax= EAT

Total Assets

Return on Equity (ROE)

The ROE is calculated as under
Earning for equity shareholders
Equity shareholders fund

Earning for Equity is calculated as

EBIT – I = EBT – Tax = EAT – Pref Dividend

Equity share holders fund = Equity Share capital + R & S

Example 10
Equity Share Capital 20,00,000
10% PS Capital 5,00,000
R&S 10,00,000
12% Debts 18,00,000
Current Liabilities 10,00,000
EBIT 9,00,000
Tax Rate 30%
Calculate (i) ROCE (ii) ROA (iii) ROE
 6. PROFITABILITY RATIO BASED ON OWNER’S POINT
OF VIEW AND BASED ON MARKET

EPS (Earning Per share)

Earning for equity shareholders
No of Equity Share

Earning for Equity is calculated as

EBIT – I = EBT – Tax = EAT – Pref Dividend

DPS (Dividend Per share)

Dividend Distributed
No of Equity Share

DIVIDEND PAYOUT RATIO

DPS X 100
EPS

RETENTION RATIO = 100 – Dividend payout ratio

PRICING EARNING RATIO

Market Price per share (MPS)
Earning per share (EPS

EARNING YILED
EPS X 100
MPS

DIVIDEND YILED
DPS X 100
MPS
 7. DU PONT ANALYSIS

Under this Analysis, Return on Equity is analyzed by

comparing Net Profit ratio, Assets Turnover Ratio and
Financial Leverage

NET PROFIT RATIO

NET PROFIT X 100
SALES

ASSETS TURNOVER RATIO

SALES
ASSETS

FINANCIAL LEVERAGE
ASSETS
EQUITY

RETURN ON EQUITY UNDER DU PONT ANALYSIS WILL BE

NET PROFIT X SALES X ASSETS

SALES ASSETS EQUITY

Example
Net Profit 2,00,000
Sales 10,00,000
Equity 12,50,000
Assets 15,00,000

Calculate Return on Equity by Du Pont Analysis

CASH FLOW
STATEMENT
 MEANING OF CASH FLOW STAEMENT

Cash flow statement is summary of cash book which shows the

movement of cash & cash equivalent from one period to another
period under following Activities:
▪ Cash flow from Operating Activities
▪ Cash flow from Investing Activities
▪ Cash flow from Financing Activities

FORMAT OF CASH FLOW STAEMENT

Particulars Rs. Rs.

A- Cash Flow From Operating Activities xxx

B- Cash Flow From Investing Activities xxx

C- Cash Flow From Financing Activities xxx

Net Increase (Decrease) in cash & Cash Equivalent xxx
(A + B + C) xxx
Add: Opening cash & cash Equivalent
Closing cash & cash Equivalent xxx

MEANING OF INVESTING ACTIVITIES

Those Activities which are related with acquisition of Fixed Assets and
Long term Investments are called Investing Activities

CASH FLOWS FROM INVESTING ACTIVITIES

In flows Out flows

▪ Sale of Fixed Assets (PPEs & I.A.)

▪ Sale of Investments
▪ Pre Acquisition dividend
▪ Income from Investments ▪ Purchase of Fixed
▪ Interest Assets
▪ Dividend ▪ Purchase of
▪ Rent Investments
▪ Loan & Advance (Including to ▪ Expenditure on
Subsidiary company) Construction of PPE
(Other than Advances to Supplier and Development of
& Employees) I.A.
▪ Interest on Loan & Advance ▪ Loan & Advances
(Other than on Advances to Given
Supplier & Employees)
▪ TDS on Interest & Dividend
Received
 MEANING OF FINANCING ACTIVITIES
Those Activities which are related with issue and repayment of
share capital and Loans & borrowing and its cost of capital are
called Financing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

In flows Out flows

▪ Buy back of Equity

shares
(including premium on
▪ Proceeds from Issue of Buy back)
Equity & Preference ▪ Redemption of
shares and Debentures preference shares and
(Including premium on Debentures
Issue) (including premium paid
▪ Raising of Loan on redemption)
▪ Any Capital Grant ▪ Repayment of Loan
received ▪ Interest Paid
▪ Dividend Paid
▪ TDS paid on Interest &
Dividend

MEANING OF OPERATING ACTIVITIES

▪ Operating Activities are those activities which are neither
Investing nor Financing Activities.
▪ These are principal revenue generating activities of Business
▪ As per AS 3, Cash flow from Operating Activities can be
calculated by two method:
▪ Direct Method
▪ Indirect Method

Note:
▪ When we say cash flow statement by Direct or Indirect method,
it is only with reference to Operating Activities.
▪ Investing & Financing activities are always calculated by Direct
method. There is no Indirect method for Investing & Financing
Activities
▪ Payment of Tax and Cash flow from Extra ordinary items will be
shown separately in cash flow statement to show the impact of
these items on current year cash flow.
▪ Cash flow from Extra ordinary items Includes following:
▪ Cash received from Insurance company as Insurance
claim
▪ Payment for any Voluntary retirement
 CASH FLOWS FROM OPERATING ACTIVITIES
UNDER DIRECT METHOD

In flows Out flows

▪ Cash Purchase of Goods

▪ Cash sale of Goods
▪ Payment to Trade payables
▪ Collection from Trade
▪ Payment for All operating
Receivables
Expenses
▪ Trading commission
▪ Payment of Tax

CASH & CASH EQUIVALENT

As per AS 3, ‘Elements of Cash are:
(a) Cash in hand and Demand deposits with banks (Bank Balance)
(b) Cash equivalents

Cash equivalents include:

▪ Short term highly liquid investments that are readily convertible
into known amounts of cash and which are subject to an
insignificant risk of changes in value
▪ Securities with short maturity period of, say, three months or
less from the date of acquisition such as:
▪ Acquisition of preference shares shortly before their
specified redemption date,
▪ Bank deposits with short maturity period, etc.

Followings are not flow of cash, so not to be considered while

preparing Cash Flow statement:
▪ Cash deposited into Bank or withdrawn from Bank
▪ Purchase / sale of Marketable securities which are having
insignificant risk of changes in value (Cash Equivalent)
▪ Issue of Bonus shares or shares issued on conversion of
Pref Shares or Debentures
▪ Purchase of Assets and consideration paid in shares or
debentures of the company
 Classify following into Operating, Investing and
Financial Activities
Items Activities
Loans and Advances given to the following
and interest earned on them:
(1) to suppliers

(2) to employees

(3) to its subsidiaries companies

Investment made in subsidiary Smart Ltd.
and dividend received
Dividend paid for the year
TDS on interest income earned on
investments made
TDS on interest earned on advance given to
suppliers
Insurance claim received against loss of
fixed asset by fire
Brokerage paid on purchase of investments
Underwriting commission paid
Trading commission received
Proceeds from sale of investment
Purchase of goodwill
Redemption of preference shares
Rent received from property held as
investment
Interest paid on long-term borrowings
Marketable securities (having risk of change
in value)
Refund of income tax received
The following summary cash account has been extracted
from the company’s accounting records, Prepare Cash Flow
Statements:
Summary Cash Account
(‘000)
Balance at 1-1-08 35
Receipts from customers 2,783
Issue of shares 300
Sale of fixed assets 128
Income from Investments 500
3,746
Payments to suppliers 2,047
Payments for fixed assets 230
Payments for overheads 115
Wages and salaries 69
Taxation 243
Dividends 80
Repayments of bank loan 250

3,034
Balance at 31-12-08 (3,746 – 3034) 712

Cash flow Statement by Direct Method

Particulars Rs. Rs.

A- Cash flow from Operating Activities
Receipts from customers 2,783
Payment to Suppliers (2047)
Payment for Overhead (115)
Payment for wages & salaries (69)
Cash from operation before Tax 552
Less: Tax Paid (243)
A - Cash flow from Operating Activities 309
B - Cash flow from Investing Activities
Income from Investments received 500
Sale of Fixed Assets 128
Purchase of Fixed Assets (230) 398
C - Cash flow from Investing Activities
Issue of shares 300
Payment for Dividend (80)
Repayment of Bank loan (250) (30)
Net Increase (Decrease) In cash & CE 677
Add: opening Cash & CE 35
Closing Cash & CE 712
 CALCULATION OF OPERATING ACTIVITIES UNDER
INDIRECT METHOD

▪ Under Indirect method, we convert net profit of entity into cash

operating profit and such cash operating profit will be cash
flow from operating Activities.

Statement Showing Cash flow from operating activities under

Indirect Method
Particulars Rs. Rs.
Change in Profit as per Balance sheet xxx
Add: Transfer to Reserve xxx
Add: Dividend Declared xxx
Add: Provision for Tax xxx
Profit Before Tax xxx
Add: Non-Cash expenses
▪ Depreciation of PPEs xxx
▪ Amortization of Goodwill and other
Intangibles xxx
▪ Preliminary Expenses written off xxx
Add (Less): Non operating expenses /
Losses/ Incomes
▪ Interest Expenses xxx
▪ Loss on sale of Fixed Asset /
Investments xxx
▪ Premium on redemption of debenture
/ pref. shares which has been written
off xxx
▪ Discount on issue of debentures w/o
▪ Income from Investments(Interest, xxx
dividend, rent) (xxx)
▪ Profit on sale of Fixed Asset /
Investments (xxx)
Cash from operation before change in
working capital xxx
Add/Less: Changes in working capital
▪ Increase in current liabilities xxx
▪ Decrease in current assets xxx
▪ Increase in current assets (xxx)
▪ Decrease in current liabilities (xxx)
Cash from operation before Tax xxx
Less: Tax Paid (xxx)
Cash flow from Operating Activities xxx
 CALCULATION OF OPERATING ACTIVITIES UNDER
INDIRECT METHOD

Example 1
From following Details, prepare Cash Flow Statement
Rs.
▪ Net profit after considering below mentioned items 10,00,000
▪ Provision for tax is 2,00,000
(Tax Paid is Rs. 1,80,000)
▪ Depreciation on F.A. 50,000
▪ Amortization of Goodwill 1,00,000
▪ Interest Expense 56,000
(Interest Actually Paid Rs. 50,000)
▪ Income on Investment earned 60,000
(Income Actually received Rs. 62,000)

Other Details for Investing and Financing

▪ Purchase of Fixed Assets 3,00,000

▪ Sale of Fixed Assets 1,80,000
▪ Sale of Investments 1,56,000
▪ Purchase if Investments 1,00,000
▪ Pre Acquisition dividend Received 30,000
▪ Issues of 10,000 shares of Rs. 10 at 20% Premium
▪ Redemption of 1500 debentures of Rs. 100 at 125 per
debentures

Details of Current Assets and current Liabilities

Opening Closing
Stock 1,50,000 2,10,000
Debtors 1,10,000 95,000
Creditors 1,20,000 1,35,000
B/P 10,000 18,000
B/R 6,000 8,000
Cash & Cash Equivalent 60,000 11,45,000
 Cash flow Statement by Indirect Method

Particulars Rs. Rs.

Profit after Tax 10,00,000
Add: Provision for Tax 2,00,000
Profit Before Tax 12,00,000
▪ Depreciation of F.A. 50,000
▪ Amortization of Goodwill 1,00,000
▪ Interest Expenses 56,000
▪ Income on Investments (60,000)
▪ Premium on Redemption of Deb 37,500
Cash from operation before change in
working capital 13,83,500
Add/Less: Changes in working capital
▪ Increase in Stock (60,000)
▪ Decrease in Debtors 15,000
▪ Increase in Creditors 15,000
▪ Increase in B/P 3,000
▪ Increase in B/R (2,000)
Cash from operation before Tax 13,54,500
Less: Tax Paid 1,80,000
A- Cash flow from Operating Activities 11,74,500

B - Cash flow from Investing Activities

Income from Investments received
Purchase of Fixed Assets 62,000
Sale of Fixed Assets (3,00,000)
Sale of Investments 1,80,000
Purchase of Investments 1,56,000
Pre-Dividend Received (1,00,000)
30,000 28,000
C - Cash flow from Investing Activities
Interest paid (50,000)
Issue of shares 1,20,000
Redemption of Debentures (1,87,500) (1,17,500)
Net Increase (Decrease) In cash & CE 10,85,000
Add: opening Cash & CE 60,000
Closing Cash & CE 11,45,000
 PREPARATION OF FIXED ASSETS A/C

F.A. A/C IS PREPARED F.A. A/C IS

AT WDV PREPARED AT COST

WHEN F.A. A/C IS PREPARED AT WDV

▪ In this case, Depreciation charged in current year is credited in

Assets a/c.
▪ When Asset is sold, then its WDV on the date of sale is credited
in Asset a/c
▪ Opening and Closing Balance of Assets are also shown at WDV.

Fixed Assets a/c (AT WDV)

Particulars Rs. Particulars Rs.
To Balance b/d xxx By Bank xxx
To Profit on sale xxx (Sale Proceeds)
To Bank (b/f) (Purchase) xxx By Loss on sale xxx
By Depreciation of C.Y. xxx
By Balance c/d xxx
xxx xxx

WHEN F.A. A/C IS PREPARED AT COST

▪ In this case, Opening & Closing Balance of Asset, Purchase and sale
all will be shown at cost in Asset a/c
▪ Depreciation charged in current year is credited in a separate a/c
known as Provision/ Accumulated Depreciation a/c
▪ When Asset is sold, then its cost is credited in Asset a/c and
Accumulated Dep on such Asset is debited to Accumulated
Depreciation a/c

Fixed Assets a/c (AT COST)

Particulars Rs. Particulars Rs.
To Balance b/d xxx By Bank (Sale Proceeds) xxx
To Profit on sale (If any) xxx By Accumulated Dep on xxx
To Bank (b/f) (Purchase) xxx Asset sold xxx
By Loss on sale (If any) xxx
By Balance c/d xxx
xxx xxx

Accumulated Depreciation a/c

Particulars Rs. Particulars Rs.
To Accumulated Dep on xxx By Balance b/d xxx
Asset sold By Depreciation of C.Y. xxx
To Balance c/d xxx
xxx xxx
Example 2
31-03-23 31-03-24
Machinery 1,50,000 2,50,000
In current year, Machine costing Rs. 2,00,000, Accumulated
Depreciation Rs. 50,000 sold for Rs. 1,20,000. Depreciation of
current year was Rs. 80,000. Prepare Machinery a/c and calculate
Machine purchased.

Example 3
31-03-23 31-03-24
Machinery 10,00,000 16,00,000

In current year, Machine costing Rs. 5,00,000, Accumulated

Depreciation Rs. 3,50,000 sold for Rs. 1,80,000. Depreciation rate
was 20% p.a. Assets are purchased and sold at beginning of the
year. Prepare Machinery a/c and calculate Machine purchased.

Example 5
31-03-23 31-03-24
Machinery 5,00,000 8,00,000
Accumulated Depreciation 1,80,000 2,70,000

In current year, Machine costing Rs. 1,20,000, Accumulated

Depreciation Rs. 50,000 sold for Rs. 60,000. Calculated Asset
purchased and Depreciation of current year

Example 6
31-03-23 31-03-24
Machinery 15,00,000 18,00,000
Accumulated Depreciation 6,00,000 8,70,000

In current year, Machine costing Rs. 5,00,000 Accumulated

Depreciation Rs. 3,00,000 sold for Rs. 2,50,000. Calculated Asset
purchased and Depreciation of current year
 TAX ADJUSTMENT

PROVISION FOR TAX IS

PROVISION FOR TAX IS
GIVEN WITHOUT
GIVEN WITH BALANCE OF
BALANCE OF ADVANCE
ADVANCE TAX
TAX

PROVISION FOR TAX IS GIVEN WITHOUT BALANCE OF ADVANCE TAX

▪ In this case, provision for tax a/c is prepared in we will
calculate either tax paid in current year or Tax provision made
(Tax Provided) in current year

Provision for Tax a/c

Particulars Rs. Particulars Rs.
To Bank (b/f) xxx By Balance b/d (Given) xxx
To Balance c/d (Given) xxx By P&L xxx
xxx xxx

Example 7
31-03-23 31-03-24
Provision for Tax 5,00,000 8,00,000

Example 8
31-03-23 31-03-24
Provision for Tax 3,00,000 6,50,000

Tax paid in 2023-24 is Rs. 3,30,000

Example 9
31-03-23 31-03-24
Provision for Tax 4,00,000 6,00,000

Tax Provision made in 2023-24 is Rs. 4,50,000

 DIVIDEND ADJUSTMENT
DIVIDEND PROPOSED / DECLARED

If Given with in Balance If Given out side the

Sheet Balance Sheet

▪ Current year Dividend

▪ Current year Dividend
will be added to Net
will be ignored
Profit
▪ Previous year dividend
▪ Previous year dividend
will be added to Net
will be treated as
profit and also shown
payment in current year
as out flow of financing
and shown as out flow
activities
of financing activities

TREATMENT INTERIM DIVIDEND

▪ Add in Net Profit

▪ Show as out flow in financing activities
CONSOLIDATED
FINANCIAL
STATEMENTS
 MEANING OF HOLDING COMPANY AND
SUBSIDIARY COMPANY
▪ Holding company means a company which control another company.
▪ Subsidiary company means a company which is controlled by another
company (Holding company)

HOW CONTROL ACQUIRED

Control is acquired when a company:

▪ Acquired more than 50% voting power of another company OR
▪ Have power to compose Board of directors of another company
Note:
▪ Voting power is acquired when equity shares are purchased. There is
no voting power in case of preference shares.

▪ Right to compose Board of director means any director can be

appointed or removed or his position can be changed.

CONSOLIDATED FINANCIAL STATEMENT (CFS)

CFS Includes Following

Consolidated Consolidated Consolidated Consolidated

Balance Profit & Loss Cash Flow Notes to
Sheet Statement Statement Accounts

CONSOLIDATION WITH SUBSIDIARIES AS PER AS

▪ Consolidation with subsidiaries will be as per AS 21

▪ AS 21 does not mandate to prepare Consolidated Financial

Statement (CFS), It only specify the process and procedure for
preparation of CFS.

▪ It means, AS 21 will be applied only when a company is preparing

CFS with its subsidiaries.

▪ AS 21 specify to prepare CFS on the basis of full consolidation

method
CONSOLIDATION PROCESS OF BALANCE SHEET AS PER
AS 21

▪ Every Holding company will consolidate the financial statement of

all its subsidiaries with its own financial statement as per the
process and procedure specified in AS 21 which are as under:
▪ All Assets and All Liabilities of Subsidiary company will be added
with Assets and Liabilities of Holding company on line by line
basis.

▪ Investments in Subsidiary companies will be replaced with net

assets of subsidiary company and we calculate cost of control
(Goodwill) or capital reserve by preparing following statement which
is known as cost of control statement:
Cost of Investments xxx
Less: Holding share in Share Capital of Subsidiary (xxx)
Less: Holding share in Pre Acquisition profit (xxx)
Goodwill (Capital Reserve) xxx

▪ Goodwill or Capital Reserve is calculated on the date when

controlling interest is acquired by Holding company (Date of
Acquisition of shares)

▪ Those Net Assets of Subsidiary companies which are not owned by

Holding company but Controlled by Holding company is called
“Minority Interest”

▪ Minority Interest is calculated as under:

Minority Share in Share Capital of Subsidiary xxx
Minority share in Pre Acquisition profit xxx
Minority share in post Acquisition profit xxx
Total Minority Interest xxx

▪ Minority Interest is calculated on each consolidated balance sheet

date.
▪ In consolidated Balance sheet, Minority Interest will be shown in
Separate heading under “Equity and Liabilities” below shareholders
fund but above Non current Liabilities.
▪ Minority Interest is calculated on each consolidated balance sheet
date.
▪ Shareholders fund in Consolidated Balance sheet will consist
following:
▪ Share capital of Holding Company only
▪ Consolidated Balance of Reserve & Surplus

▪ Balance of Consolidated Reserve & Surplus will be calculated as

under
Reserve & Surplus of Holding company xxx
Holding share in in post Acquisition Reserve / profit xxx
Capital Reserve arise under cost of control (If any) xxx
Consolidated Reserve & Surplus xxx
 PROFITS OF SUBSIDIARY COMPANY

PRE - ACQUISSITION POST ACQUISSITION

PROFITS & RESERVES PROFITS & RESERVES

Profit & Reserves earned Profit & Reserves earned

by subsidiary company by subsidiary company
up to the date of after the acquisition of
acquisition of control by control by Holding
Holding company company

Share of
Share of Holding in
Holding in Share of
Share of post
pre profit & Minority
Minority is Reserve &
Reserve is is taken
taken in profit is
Deducted in
Minority Added in
from cost Minority
of Interest respective
Interest
Investment reserve &
profits

HOW TO CALCULATE PREP AND POST PROFITS

Example 1
H Ltd acquire 80% shares in S Ltd for Rs. 15,00,000 on 01-04-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 10,00,000
General Reserve Rs. 3,00,000(Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 4,00,000 (Rs. 1,00,000 on 01-04-2023)

Calculate Cost of control, Minority Interest and consolidated R&S

assuming GR and P&L of H Ltd was Rs. 4,00,000 and Rs. 5,00,000

Example 2
H Ltd acquire 70% shares in S Ltd for Rs. 16,00,000 on 01-10-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 12,00,000
General Reserve Rs. 4,00,000(Rs. 1,60,000 on 01-04-2023)
Profit & Loss Rs. 6,00,000 (Rs. 2,40,000 on 01-04-2023)

Calculate Cost of control, Minority Interest and consolidated R&S

assuming GR and P&L of H Ltd was Rs. 5,00,000 and Rs. 8,00,000
Example 3
H Ltd acquire 60% shares in S Ltd for Rs. 10,00,000 on 01-08-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 11,00,000
General Reserve Rs. 3,00,000(Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 5,00,000 (Rs. 1,40,000 on 01-04-2023)

Calculate Cost of control, Minority Interest and consolidated R&S

assuming GR and P&L of H Ltd was Rs. 5,00,000 and Rs. 8,00,000

IMPORTANT ADJUSTMENTS
1. ABNORMAL LOSS/GAIN

When in current year, there is any abnormal loss or gain in subsidiary

company, then following treatment is required in AOP:
▪ If Abnormal Loss, Add in Closing Balance of Profit
▪ If Abnormal Gain, deduct from Closing Balance of Profit
▪ Apply time adjustment
▪ After that:
▪ Deduct abnormal loss from pre or post profit depending in
which period loss occurred.
▪ Add Abnormal gain in Pre or post profit as the case may
be depending in which period profit arise.

Example 4
H Ltd acquire 80% shares in S Ltd for Rs. 15,00,000 on 01-09-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 10,00,000
General Reserve Rs. 3,00,000(Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 4,00,000 (Rs. 1,00,000 on 01-04-2023)

In August 2023, Loss by fire Rs. 1,50,000, Insurance claim Rs. 90,000.
Calculate Cost of control, Minority Interest and consolidated R&S
assuming GR and P&L of H Ltd was Rs. 4,00,000 and Rs. 5,00,000

Example 5
H Ltd acquire 70% shares in S Ltd for Rs. 20,00,000 on 01-08-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital Rs. 20,00,000
General Reserve Rs. 5,00,000 (Rs. 1,40,000 on 01-04-2023)
Profit & Loss Rs. 3,00,000 (Rs. 1,20,000 on 01-04-2023)

Loss by fire:
▪ In July 2023 - Rs. 1,50,000,
▪ In Dec 2023 - Rs. 90,000

Calculate Cost of control and Minority Interest and Consolidated R&S

assuming GR and P&L of H Ltd was Rs. 8,00,000 and Rs. 7,00,000
2. BONUS ISSUE OF SHARES BY SUBSIDIARY COMPANY

▪ When in current year, there is Bonus issue of shares by subsidiary

company, then it increases Share capital of subsidiary company and
decrease Reserve & Surplus (General Reserve or Profit & Loss) of
subsidiary company.
▪ Treatment of Bonus issue is depend on the fact that whether:
▪ Entry for Bonus has not been passed by Subsidiary company
before consolidation
▪ Entry for Bonus has been passed by Subsidiary company
before consolidation

TREATMENT WHEN ENTRY FOR BONUS ISSUE HAS NOT PASSED

BY SUBSIDIARY COMPANY BEFORE CONSOLIDATION

▪ Calculate Bonus Amount

▪ Add Bonus amount in share capital of subsidiary company and
▪ Deduct Bonus amount from Pre or Post Profit of subsidiary company
in AOP depending from which profit, Bonus is distributed.
▪ If nothing specified, always assume Bonus from pre profits

Notes:
▪ There is no change in holding ratio due to issue of bonus shares
▪ Share of holding company and Minority interest in share capital and
Profit will be calculated after the above adjustment of Bonus

Example 6
H Ltd acquire 80,000 shares in S Ltd for Rs. 15,00,000 on 01-09-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital (Rs. 10) Rs. 10,00,000
General Reserve Rs. 3,00,000 (Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 4,00,000 (Rs. 1,00,000 on 01-04-2023)

On 31-03-24, S Ltd issued Bonus shares in the ratio of 1:4 for which no
entry has yet been passed. Calculate Cost of control, Minority Interest
and consolidated R&S assuming GR and P&L of H Ltd was Rs. 4,00,000
and Rs. 5,00,000
TREATMENT WHEN ENTRY FOR BONUS ISSUE HAS PASSED BY
SUBSIDIARY COMPANY BEFORE CONSOLIDATION

When Entry for Bonus has already been passed, then following
procedure will be followed at the time of consolidation:
▪ Calculate Bonus Amount
▪ Add Bonus amount in Closing Balance of General Reserve / Profit
& Loss of subsidiary company in AOP
▪ Calculate increase in General Reserve / Profit & Loss in current
year
▪ Apply time Adjustment
▪ Deduct Bonus Amount from pre or post profit from where bonus
was declared
(If Nothing specified, Bonus is assumed to be deducted from pre
profit)

Example 7
H Ltd acquire 80,000 shares in S Ltd for Rs. 15,00,000 on 01-08-2023.
Following details of S Ltd is provided to you on 31-03-2024:
Share capital (Rs. 10) Rs. 14,00,000
General Reserve Rs. 6,00,000 (Rs. 1,20,000 on 01-04-2023)
Profit & Loss Rs. 7,00,000 (Rs. 1,00,000 on 01-04-2023)

On 01-01-24, S Ltd issued Bonus shares in the ratio of 2:5 for which
entry has already been passed. Calculate Cost of control, Minority
Interest and consolidated R&S assuming GR and P&L of H Ltd was Rs.
8,00,000 and Rs. 15,00,000

3. DIVIDEND DECLARED BY SUBSIDIARY COMPANY

▪ When in current year, there is Dividend declared by subsidiary

company after the purchase of shares by Holding company, then
Holding company will also received dividend from subsidiary
company as major shareholder.

▪ Treatment of Dividend by Holding company will depend whether

dividend is received out of Pre profit or Post profit

TREATMENT OF DIVIDEND BY HOLDING COMPANY

DIVIDEND RECEIVED FROM DIVIDEND RECEIVED FROM POST

PRE - ACQUISITION PROFITS - ACQUISITION PROFITS

It will be treated as recovery It will be treated as Income

of cost and credited to and credited to Profit &
Investment a/c Loss a/c
Notes:
▪ Sometime Dividend Received from subsidiary company out of pre
profit but it is credited to P&L.
▪ In this case, a Rectification Entry will be passed by Holding
company as under:
P&L a/c Dr.
To Investment a/c

▪ Effect of above entry will be:

▪ Dividend received by Holding company will be deducted
▪ From Consolidated P&L in consolidated R&S
▪ From Cost of Investment in cost of control

TREATMENT OF DIVIDEND DECLARED BY SUBSIDIARY

COMPANY IN AOP
▪ Calculate Dividend Amount
▪ Add Dividend amount in Closing Balance of Profit & Loss of
subsidiary company in AOP
▪ Calculate increase in Profit & Loss in current year
▪ Apply time Adjustment
▪ Deduct Dividend Amount from pre or post profit from where
Dividend was declared

Notes:
If dividend of previous year is declared in current year and shares are
purchased by holding company in current year, then Dividend will be
assumed to be declared out of pre acquisition profit (Out of Profit of
Previous year)

Example 8
H Ltd acquire 70% shares in S Ltd for Rs. 15,00,000 on 01-8-2023. Following
details of S Ltd is provided to you on 31-03-2024:
Share capital (Rs. 10) Rs. 10,00,000
General Reserve Rs. 3,00,000 (Rs. 1,50,000 on 01-04-2023)
Profit & Loss Rs. 5,00,000 (Rs. 1,40,000 on 01-04-2023)

On 25-10-23, S Ltd declared and paid dividend for the year ended 31-03-23 @
12%. H Ltd credited such dividend in its Profit & Loss a/c.
Calculate Cost of control, Minority Interest and consolidated R&S assuming
GR and P&L of H Ltd was Rs. 3,00,000 and Rs. 8,00,000
 4. TREATMENT OF CONTRA ITEMS
▪ Contra items are those items which are included in Debtors,
Creditors, B/R, B/P and Loan and which are Receivable / Payable to
each other

▪ All contra items which are receivable / payable to each other will be
eliminated while preparing consolidated Financial statement

Creditors/B/P/ Loan Payable a/c Dr.

To Debtors/ B/R/ Loan Receivable a/c
(Being Contra Items are eliminated)

5. STOCK RESERVE
▪ When Holding company or subsidiary company sold goods to each
other before consolidation at Normal selling price and on the date of
consolidation, such goods or part of such goods is still in the stock
of the company which purchase goods, then we have to calculate
Profit earned by selling company which is included in such stock.

▪ Such profit is treated as unrealized profit on the date of

consolidation and it is also known as “Stock Reserve”.

TREATMENT OF STOCK RESERVE

WHEN TRANSACTION IS DWON STREAM WHEN TRANSACTION IS UP STREAM

(GOODS SOLD BY HOLDING TO (GOODS SOLD BY SUBSIDIARY TO

SUBSIDIARY) HOLDING)

TREATMENT: TREATMENT:
▪ STOCK RESERVE IS DEDUCTED ▪ STOCK RESERVE IS DEDUCTED
FROM STOCK IN CBS FROM STOCK IN CBS

▪ IT IS ALSO DEDUCTED FROM PROFIT ▪ IT IS ALSO DEDUCTED FROM

OF HOLDING COMPANY IN POST PROFIT OF SUBSIDIARY
CONSOLIDATED R&S COMPANY IN AOP
Example 9
H Ltd has a Subsidiary, S Ltd. H Ltd sold Goods to S Ltd for Rs. 5,00,000
at cost + 25%. Entire goods has been in stock of S Ltd. Calculate Stock
Reserve and its treatment.

Example 10
H Ltd has a Subsidiary, S Ltd. S Ltd sold Goods to H Ltd for Rs. 8,00,000
at cost + 20%. Goods of the value of Rs. 3,00,000 is still in stock of H Ltd.
Calculate Stock Reserve and its treatment

6. REVALUATION OF ASSETS OF SUBSIDIARY ON THE DATE OF

ACQUSITION OF SHARES BY HOLDING

▪ When Holding company acquired shares, then it may be possible

that some of Assets of Subsidiary company are Revalued on the
date of acquisition of shares the effect of which has not yet given.
▪ Profit or Loss on Revaluation will be treated as Pre Profit or loss for
Holding company and it is considered for calculation of Goodwill or
Capital reserve in Cost of control.
▪ Revised Value of Assets of subsidiary company will be added with
Assets of Holding company in CBS after adjustment of Additional
Depreciation or saving in Depreciation.
▪ Additional Depreciation is calculated as under:
Depreciation on New Value of Assets for post period xxx
Less: Depreciation on old Value of Assets for post period xxx
Additional Depreciation / Saving in Depreciation xxx

▪ Additional Dep is deducted and saving in Dep is added in Post profit

in AOP.
▪ Value of Assets to be shown in CBS is calculated as under:
Value of Assets of Holding Company xxx
Add: Revised Value of Assets of Subsidiary company xxx
Less: Depreciation on Revised value for post period (xxx)
Assets to be shown in CBS xxx

Example 11
The Balance sheet of H Ltd and S Ltd as at 31-03-24 is given below:
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share Capital 4,00,000 3,00,000 Machinery 5,00,000 2,70,000
(Rs. 10) Furniture 2,00,000 1,20,000
General Reserve 1,00,000 10,000 Investments in
Profit & Loss 4,80,000 40,000 Shares in S Ltd 4,80,000 --
Current Liabilities 5,00,000 90,000 Current Assets 3,00,000 50,000
14,80,000 4,40,000 14,80,000 4,40,000

H Ltd Acquired 80% shares in S Ltd on 01- 04 -23 when the General Reserve
and Profit & Loss of S Ltd was Rs. 4,000 and 10,000.
The Book value of Machine & Furniture of S Ltd on 01-04-23 was Rs.
3,00,000 and Rs. 1,50,000 which was Revalued at Rs. 4,00,000 and Rs.
1,30,000 respectively but no effect of which has been given in above
Balance sheet.
Prepare CBS
Ans. Goodwill Rs. 1,68,000, MI Rs. 84,800
Example 12
The Balance sheet of H Ltd and S Ltd as at 31-03-24 is given below:
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share Capital 16,00,000 12,00,000 Machinery 17,00,000 10,80,000
(Rs. 10) Furniture 8,00,000 4,80,000
General Reserve 3,20,000 50,000 Investments in
Profit & Loss 20,00,000 1,50,000 Shares in S Ltd 19,20,000 --
Current Liabilities 8,00,000 2,50,000 Current Assets 3,00,000 90,000
47,20,000 16,50,000 47,20,000 16,50,000

H Ltd Acquired 70% shares in S Ltd on 01- 10 -23 when the General
Reserve and Profit & Loss of S Ltd was Rs. 20,000 and 50,000.
The Book value of Machine & Furniture of S Ltd on 01-04-23 was Rs.
12,00,000 and Rs. 6,00,000 which was Revalued at Rs. 16,00,000 and
Rs. 5,20,000 respectively on 01-10-2023 but no effect of which has
been given in above Balance sheet.
Prepare CBS
Ans. Goodwill Rs. 6,84,500, MI Rs. 5,48,400

7. PREFERENCE SHARES IN SUBSIDIARY COMPANY

▪ If there is Preference share capital in subsidiary company, then

following treatment will be required:
▪ If preference shares are not held by Holding company, then
entire preference share capital of subsidiary company will be
shown in Minority Interest.

▪ But if some preference shares of subsidiary company are

acquired / hold by holding company, then following treatment will
be made:
▪ Investment in Preference shares is taken in cost of control
along with Investment in equity shares
▪ Percentage of Preference share capital held by Holding
company is deducted from cost of investment in cost of
control and Preference Share capital not held by holding
company will be taken in Minority Interest.

9. CONSOLIDATE PROFIT & LOSS STATEMENT

▪ Consolidated P&L is prepared in the same format in which company
prepare its separate P&L statement as per schedule III

▪ In Consolidated P&L, all items of income and expenses of Subsidiary

company are added with Income and Expenses of Holding company
on Line by Line basis.

▪ If there is contra items, then they should be eliminated while

preparing Consolidated P&L

▪ Contra items includes following:

▪ Goods sold to each other
▪ Services rendered to each other
▪ Unrealized profit included in inventories