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A balance sheet that shows debit reserves & surplus

Learner (Digital Assistant) (70 Points)

24 May 2016

Hello all,

Consider a hypothetical case where the business entity is a running Pvt Ltd Co with a paid up capital of INR 1.0 lakh. The reserves and surplus account of the balance sheet of this company shows a debit balance of 2.8 lakh. My questions are:

1. What message goes to a finance-savvy professional who reads this balance sheet? What insight do they immediately discern upon reading these figures?

2. Suppose it is decided to eliminate the debit balance in the reserves and surplus account, and transform it into a credit balance. What entries will be required to be passed in order to do so? Should one credit reserves and surplus a/c and debit the bank/cash a/c?

Thank you in advance for your guidance.

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4 Replies

mohammad rasool baig (Management Consultant) (1026 Points)
Replied 24 May 2016

1. It shows that the company is having the negative capital balance & capital of the company is not sufficient to write off the losses of the company

2. Introduce the capital & then write off the losses.

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Learner (Digital Assistant) (70 Points)
Replied 24 May 2016

Originally posted by : mohammad rasool baig
	1. It shows that the company is having the negative capital balance & capital of the company is not sufficient to write off the losses of the company 2. Introduce the capital & then write off the losses.

Hello,

Thank you for resolving my query. I have further questions to the response you gave in point 2. And it is that:

(i) At the time of incorporation of the company, Capital account was debited by INR 1.0 lakh. This is as per the MoA/AoA. In order to debit Capital Account further, will I have to amend these documents appropriately?

(ii) What accounting entry do I pass in order to infuse further capital? I thought that crediting the cash/bank a/c and debiting the reserves and surplus a/c will do the trick? Also, by retaining the now +ve reserves and surplus account (by not touching the money of INR 2.8 lakh, and let it remain in the bank througout the financial year), my balance sheet will show a more healthy picture. Perhaps if I open a separate bank account and park this money there, it truly reflects the "reserves and surplus" nature of the money?

(iii) What entries need to be posted if I were to show a "write-off"? What a/c to credit and what a/c to debit?

(iv) In this fictional company, cash on hand is miniscule, say INR 15K. Are there any tax implications consequent to my actions of (ii)?

Thank you in advance for all your advice and inputs.

mohammad rasool baig (Management Consultant) (1026 Points)
Replied 24 May 2016

1. What is the authorised capital as per company MOA/AOA

2. What is the loans or current liabilities of the company

Capital introduction will not have any tax implications, if you have proper source for the introduced capital

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Learner (Digital Assistant) (70 Points)
Replied 24 May 2016

Originally posted by : mohammad rasool baig
	1. What is the authorised capital as per company MOA/AOA 2. What is the loans or current liabilities of the company Capital introduction will not have any tax implications, if you have proper source for the introduced capital

Hello,

Thanks for the answer provided.

1. The authorized and paid-up capital of the Company as per MoA/AoA are INR 1.0 lakh.

2. The Company has not taken any loan. It shows a liability (salary payable) of about INR 60K in its books. This liability is intended to be nullified in the current financial year.

The source for the freshly introduced capital is the income actually realized.

Thanks once again for the guidance being given.