In a company electric charges is paid by Company for consumption by Directors at their residence for Rs.10,000 for the whole year and at the last of the year the whole charges so paid is received by company in cash by Directors .Therefore the closing balance of electric charges ledger is Nil .Should it be disclosed in audited Accounts?
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Treatment of Electricity expenses
Replies (6)
write in audit report
Check whether the amount is substantial or not as per AAS 12 and requirement of P/L a/c as per Part II of Schedule VI i.e Rs 5000 or 1% of Sales, whichever is lower.
The amount may be shown in disclosure as per AS 18.
shaleen sir what prob may occure if its not disclosed . whats the reason behind you telling it to disclose. any notification or standard or any thing else?
23. If there have been transactions between related parties, during
the existence of a related party relationship, the reporting enterprise
should disclose the following:
(i) the name of the transacting related party;
(ii) a descripttion of the relationship between the parties;
(iii) a descripttion of the nature of transactions;
(iv) volume of the transactions either as an amount or as an
appropriate proportion;
(v) any other elements of the related party transactions necessary
for an understanding of the financial statements;
(vi) the amounts or appropriate proportions of outstanding items
pertaining to related parties at the balance sheet date and
provisions for doubtful debts due from such parties at that
date; and
(vii) amounts written off or written back in the period in respect of
debts due from or to related parties.
Director is a related party of the company. just disclose in the notes to the accounts as per AS-18.
Check whats the basis for making the payments in the first place. is there any authorisation by the board(see minutes)?
It should be disclosed, because AS-18 requires that the financial statements are made to give an unprejudiced view of the performance of the enterprise. If Rs.10,000 was given as a loan or put in a bank, then its value would not have been 10,000 at the year end. So in effect the directors were given interest free loans.
CARO Requires that u should report if loans have been given to related parties at rate of interest that is prejudicial to the interest of the company. Just disclose it as an advance.
Moreover if there is accumlated profits, then to the extent paid to directors, it will form part of dividend u/s2(22)(e). This section is overlooked many times by many companies. They later face problems during scrutiny assessment.Since 2(22)(e) are liable for TDS, the company should deduct tax. YOU HEARD IT RIGHT. THE COMPANY SHOULD DEDUCT TAX ON ADVANCE TO DIRECTORS. And this amount should be taxed in hands of directors
All the above provisions are applicable if the company is closely held company. If it s not closely held company, then no problem from taxation point of view.
It has to be disclosed in the notes on accounts as it is a related party transaction as per AS-18
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