Introduction to Corporate Accounting [Financial Accounting Notes NEP 2023]

Introduction to Corporate Accounting
Financial Accounting Notes NEP 2023

Section 128 of the Companies Act, 2013 requires that every company shall prepare and keep at its registered office books of accounts and other relevant books and papers and financial statements for every financial year which give a true and fair view of the state of affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such book will be kept on accrual basis and according to the double entry system of accounting. “Books of account” as defined in Section 2(13) includes records maintained in respect of:

a)    All sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;

b)    All sales and purchases of goods and services by the company;

c)    The assets and liabilities of the company; and

d)    The items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section.

Place of keeping books of accounts: All or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving full address of that other place.

Electronic Mode: The Company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed. The books of account and other books and papers maintained by the company within India shall be open for inspection at the registered office of the company. The books of account of every company relating to a period of not less than eight financial years immediately preceding a financial year, or where the company had been in existence for a period less than eight years, in respect of all the preceding years together with the vouchers relevant to any entry in such books of account shall be kept in good order.

Period for preserving books account: The books of accounts along with other relevant documents are required to be preserved in good order by the company for a period of not less than eight years immediately preceding the relevant financial year.

Inspection of books of accounts by any director or other parties: As per Sec 128 (3) of the Companies Act’ 2013, the books of accounts and other books and papers shall be open for inspection by any director during business hours. Such inspection may be done by any type of director- nominee, independent, promoter or whole time. The directors can also make inspection through agents. However, the right of inspection is not an absolute right and may be refused if director has vacated the office or convicted of any offense.

The books of accounts can also be inspected during business hours by:

a) The ROC

b) Authorised officer of the Central government.

c) Authorised officers of SEBI.

Responsibility for keeping books of account:  The primary duty for the proper maintenance of the books of account is that of the managing director or manager. If company has neither a managing director nor manager, every director of the company is responsible of keeping books of account. The following person responsible to take all reasonable steps to secure compliance by the company with the requirement of maintenance of books of accounts: (sub-section 6):

a)    Managing Director,

b)    Whole-Time Director, in charge of finance

c)    Chief Financial Officer

d)    Any other person of a company charged by the Board with duty of complying with provisions of section 128.

The annual accounts or financial statements of a Company consist of two statements, namely Profit and Loss Account (Income Statement) and Balance Sheet (Position statement). At every AGM, the board of directors shall lay before the meeting – Income statement, Balance sheet and a report by the Company’s board of directors. In case of not trading entities, an income and expenditure account shall be laid before the company at its annual general meeting instead of profit and loss account.

Section 129 of the Companies Act, 2013 requires that the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards under Section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.

Where a company has one or more subsidiaries, it shall in addition to its financial statements, prepare a consolidated financial statements of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statements.

It is further stated that the books of account should be maintained on accrual basis and according to the double entry system of accounting to ensure that these represent true and fair view of the affairs of the company or branch office, as the case may be. The Act requires that proper stock records should form a necessary part of proper books of account and also that the books of account and the relevant vouchers must be preserved for a minimum period of eight years in good order. 

Statutory and Statistical Books Maintained by Company:

Statutory book: Such books are those which a limited company is under statutory obligation to maintain at its registered office with a view to safeguard the interests of shareholders and creditors. Main statutory books are:

a.       Register of investments held and their names

b.       Register of charges

c.       Register of members

d.       Register of debenture holders

e.       Annual returns

f.        Minute books

g.       Register of contracts

h.       Register of directors

i.         Register of director’s shareholdings

j.         Register of loans to companies under the same management

k.       Register of investment in the shares and debentures of other companies

l.         Register of fixed deposits

m.     Index of members where the number is more than fifty unless register of members itself affords an index

n.       Index of debenture holders where the number is more than fifty, unless the register of debenture holders itself affords an index

o.       Foreign register of members and debenture holders, if any

p.       Register of renewed and duplicate certificates.

Statistical Books:

In order to keep a complete record of numerous details of certain transactions and activities of the company the following statistical books are usually maintained by joint stock companies in addition to statutory books. The keeping of such books are optional. The main books are:

a.       Share application and allotment book

b.       Share calls book

c.       Share certificate book

d.       Debenture application and allotment book

e.       Debenture calls book

f.        Register of share transfers

g.       Dividend book

h.       Debenture interest book

i.         Register of documents sealed

j.         Register of share warrants

k.       Dividend mandates register

l.         Register of debenture transfers

m.     Register of powers of attorney

n.       Agenda book

o.       Register of lost share certificates

p.      Register of director’s Attendance

Qualification of a Company Auditor [Sec. 141]:

According to Section 141 of the Companies Act, 2013 the prescribed qualifications of an auditor are as follows:

a. An individual shall be eligible for appointment as an auditor of a company only if he is a chartered accountant.

b. A firm shall be eligible for appointment as an auditor of a company in the name of the firm only if majority of its partners are practicing in India as chartered accountants. Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.

Disqualification of a Company Auditor [Sec. 141(3)]:

According to section 141(3) of the Companies Act, 2013, the following persons shall not be appointed as auditors of a company:

i.         A body corporate: A company other than a limited liability partnership cannot audit any other company,

ii.       An officer or employee of the company.

iii.     A person who is either a partner or employee of an officer or employee of the company.

iv.     A person who or his relative or his partner has taken debt from the company for amount exceeding Rs. 5, 00,000.

v.       A person who or his relative or his partner has taken guarantee of another person who has taken a loan exceeding Rs. 1, 00,000 from the company.

vi.     A person who is or his relative or his partner is holding any security in the company or its subsidiary company or its holding company or its associate company or a subsidiary of such holding company.

vii.    A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.

viii.  A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction.

ix.      Any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided u/s 144.

A person, who is disqualified for being appointed as auditor of a company, is automatically disqualified for being auditor of its holding company or its subsidiary company or any other subsidiary of holding company.

According to Section 224 of the Companies Act, every company whether private or public must appoint an Auditor or auditors to audit the final accounts. The provisions relating to the appointment of auditor are as follows:

1.       Appointment of First Auditors:

(a) In case of a Non-Government Company [Sec. 139(6)]: The first auditor of the company is to be appointed by BOD within 30 days from the date of incorporation of company. Note here that this is not from the date of commencement of business. First auditor shall hold office upto the conclusion of first AGM. If BOD fails to appoint the first auditor, it shall inform the members of the company. The members of the shall within 90 days at an extraordinary general meeting appoint the auditor.

(b) In case of a Government Company [Sec. 139(7)]: In case of any government company or any other company which is owned or controlled by central or state government either directly or indirectly, the first auditor shall be appointed by the Comptroller and Auditor General (CAG) of India within 60 days from the date of registration of the company. In case the CAG does not appoint such auditor within the above period, the Board of directors of the company shall appoint such auditor within next 30 days.

2.       Appointment of Subsequent auditors:

(a) In case of Non-Government Company [Sec. 139(1)]: Every company shall, at the first AGM appoint an individual or firm as an auditor who shall hold office form the conclusion of that meeting till the conclusion of its 6^th AGM and thereafter till the conclusion of every 6^th meeting. The following points need to be noted in this regard:

a. The company shall place the matter relating to such appointment by member at every annual general meeting.

b. Before such appointment is made, the written consent of the Auditor to such appointment and a certificate should be obtained. The certificate shall also indicate whether the auditor satisfies the criteria provided in sec. 141.

c. The company shall inform the auditor concerned of his or its appointment.

d. The company shall also file a notice of such appointment with the registrar within 15 days of such appointment.

(b) In Case of Government Companies [Sec. 139(5)]: In case of any government company or any other company which is owned or controlled by central or state government either directly or indirectly, the Comptroller and Auditor General (CAG) shall in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the AGM.

3.       Filling of Casual Vacancies [Section 139(8)]:

In the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the CAG of India:

(a) Any Casual Vacancy due to reasons other than resignation: Any casual vacancy in the office of an auditor shall be filled by the board of directors within 30 days.

(b) Any Casual vacancy due to resignation: Such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the board and he shall hold the office till the conclusion of the next annual general meeting.

In the case of a company whose accounts are subject to audit by an auditor appointed by the CAG of India:

(a) Any casual vacancy in the office of an auditor shall be filled by the CAG of India within 30 days.

(b) In case the CAG of India does not fill the vacancy within the given period, the board of directors shall fill the vacancy within next 30 days.

Audit report is a statement on financial position of the company which is issued after the conclusion of audit. It is a medium through which an auditor expresses his opinion on the financial statements under audit.  It generally shows the nature and scope of audit conducted by the auditor and his opinion on the final accounts of the company. It is an important part of audit because it provides the results of the audit conducted by the auditor. The audit report is the final and ultimate report of audit process.

Elements of Audit Report or Essentials of Good Audit Report

1. Title: An auditor report must have appropriate title, such as "Auditor's Report". It is helpful for the reader to identify the auditor's report. It is easy to distinguish it from other reports. The management can issue any report about the business performance. The title of the report is essential. 

2. Addressee: The addressee may be shareholder or board of director of a company. The auditor can audit financial statements of any business unit as per agreement. The report should be appropriately addressed as required by engagement letter and legal requirements. The report is usually addresses to the shareholders or the board of directors. 

3. Date of Report: The report should be dated. It informs the reader that the auditor considered the effect on the financial statements and in his report of events or transactions about which he become aware the occurred up to that date.

4. Identification: The audit report should identify the financial statement that have audited. The financial statement may include trading profit and loss accounts, balance sheet and statement of changes in financial position and sources and application of frauds statement. The report should include the name of the entity. Moreover, the data and period covered by the financial statement are also stated in it. 

5. Reference to Auditing Standards: The audit report should indicate the auditing standard or practice followed in conducting the audit. The international auditing guidelines need assurance that the audit has been conducted as per set standards. 

6. Opinion: The auditor's report should clearly state the auditor's opinion on the presentation in the financial statement of the entity's financial position and the result of its operations. The statement give a true and fair view is an auditor's opinion. This opinion is usually based on national standard or international accounting standards. 

7. Signature: The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate. 

8. Auditor's Address: The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers. 

The ministry of corporate affairs has laid down the new format of statutory audits of companies which includes the following details:

1)        Details of tangible and intangible assets.

2)        Details of inventory and working capital.

3)        Details of investments, any guarantee or security or advances or loans given.

4)        Compliance in respect of a loan to directors.

5)        Compliance in respect of deposits accepted.

6)        Maintenance of costing records.

7)        Deposit of statutory liabilities.

8)        Unrecorded income.

9)        Default in repayment of borrowings.

10)     Funds raised and utilizations.

11)     Fraud and whistle-blower complaints.

12)     Compliance by a Nidhi.

13)     Compliance on transactions with related parties.

14)     Internal audit system.

15)     Resignation of statutory auditors.

16)     Non-cash dealings with directors.

17)     Registration under Sec. 45-IA or RBI Act, 1934

18)     Cash losses.

19)     Material uncertainty on meeting liabilities.

20)     Transfer of funds specified under schedule VII of the Companies Act’ 2013.

21)     Qualification or adverse auditor remarks in other group companies.

Book building is a process of fixing price for an issue of securities on a feedback from potential investors based upon their perception about a company. It involves selling an issue step-wise to investors at an acceptable price with the help of a few intermediaries’/merchant bankers who are called book-runners. Under book-building process, the issue price is not determined in advance, it is determined by the offer of potential investors. The book runner maintains a record of various offers and the price at which the institutional buyers, mutual funds, underwriters etc. are willing to subscribe to securities. On receipt of the information, the book runner and the issuer company determine the price at which the issue will be made. Thus, book-building helps in determining the price of an issue on more realistic way based on the intrinsic worth of the security. The main objective of book building is to arrive at fair pricing of the issue which is supposed to emerge out of offers given by various large investors like mutual funds and institutional investors.

As per SEBI guidelines, in an issue of securities through a prospectus option of 100% Book Building is also available to an issuer company if Issue of capital is Rs.25 crores and above. In India, there are two options for book building process. One, 25% of the issue has to be sold at fixed price and 75% is through book building. The other option is to split 25% of offer to the public (small investors) into a fixed price portion of 10% and a reservation in the book built amounting to 15% of the issue size. The rest of the book-built portion is open to any investor.

Procedure for the Book Building Process

The modern and more popular method of share pricing these days is the Book Building route. Procedure of book building is stated below:

a) Appointment of merchant banker as a book runner whose main purpose was to maintain the records of various offer prices at which potential investors are willing to subscribe to securities.

b) After appointing a merchant banker as a book runner, the company planning the IPO (i.e., initial public offer), specifies the number of shares it wishes to sell and also mentions a price band.

c) Potential Investors place their orders in Book Building process at a price higher than the floor price indicated by the company in the price band to the book runner.

d) Once the book building period ends, the book runner evaluates the bids on the basis of the prices received, investor quality and timing of bids.

e) Then the book runner and the company conclude the final price at which the issuing company is willing to issue the stock and allocate securities. Traditionally, the numbers of shares are fixed and the issue size gets determined on the basis of price per share discussed through the book building process.