1. ACCOUNTING AND AUDITING PRACTICES

1.1 Query


Disclosure in Profit & Loss Account of Bills Paid
Which are in Excess of Liability Admitted in Previous
Year’s Accounts.

It is usual for our Company to pay in any year, expenses of routine nature which pertain to previous year or years. We have some instances where we did make provision in the previous year’s Accounts on account of expenses, the quantum of which was not known to us and which we could not have determined with reasonable accuracy. In the subsequent years, bills were received for the previous years as well as for the current year and payments were made exceeding the provision made in the previous years with reference to the actual liability relating to those years. As an example, suppose, a provision has been made on account of liability at the rate of Rs. 5,000/- per year in two previous years. In the current year, a bill was received for Rs. 20,000/- at the rate of Rs. 10,000/- per year. Thus, in this manner, Rs. 10,000/- are said to be short-provided on account of previous two years and it is argued that these Rs. 10,000/- are to be shown as expenses pertaining to previous years in the current year’s Accounts. Of course, the view here is that amounts only if material in nature, say to the extent of 5% of the expenditure on the particular head of account, would require separate disclosure as “Expenses pertaining to previous years”, otherwise not. My personal feeling is that when a company makes a provision on the basis of the data available, if any, or the knowledge it has and is subsequently asked to pay something in excess of the provision on account of previous years, then, such excess payments should not be treated as expenses pertaining to previous years in the current year’s Accounts. Besides, such expenses are of recurring nature. Separate disclosure would, in my opinion, be required so as to disclose a true and fair view of the profit that is arrived for the year, if a usual charge is made to Profit & Loss Account which is of a non-recurring nature and is material in amount. I shall feel obliged if you will kindly let me have your esteemed opinion as to how items indicated above have to be disclosed in the Profit & Loss Account in strict accordance with the form laid down in the Companies Act, 1956.



Opinion June 30, 1961

The Committee was of the view that in view of the requirements of Section 210 that the Profit & Loss Account should relate to an accounting period and that by virtue of item 2(a) of Part II, Schedule VI to the Companies Act, the Profit and Loss Account should clearly disclose the result of the working of the company during the period covered by the account. Unprovided amounts, if material in nature, should be disclosed as expenses pertaining to previous year. The Profit & Loss Account by virtue of Section 211 is also required to show a true and fair view of the profit or loss of the company for the financial year. Therefore, though there may be a full justification for not having provided the amount in the previous year, the requirement of disclosure in the subsequent year should be compiled with to enable the reader of the accounts to estimate the true result of the working of the company during the period covered by the account.