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August 2024

Is Surplus in Profit and Loss Account a Free Reserve?

By Pramod Prabhudesai, Chartered Accountant
Reading Time 17 mins

When I pose this question, the immediate answer is, “Any Doubt?” If we see the provisions of the Companies Act, 2013 (CA 2013) as well as the previous Act (CA 1956), one will note that the answer is not free from doubt.

CA 2013 contains several provisions where limits under the sections are calculated as per cent of Paid up Capital and Free Reserves such as section 68 (Buy Back of shares), section 73 (Acceptance of Deposits), section 180 (Borrowing Powers of the Board), section 186 (Loans and Investments by companies). If these calculations are incorrectly made by including an item wrongly in Free Reserves, it can involve a violation under CA 2013.

Let us, therefore, see some of the related provisions of the CA 1956/2013, and related rules and seek a reply to our query regarding surplus in the Profit and Loss Account.

I. PRESENTATION OF SURPLUS IN BALANCE SHEET

Let us have a look at the provisions of Schedule III Part I for the presentation of Reserves and Surplus.

Reserves and Surplus:

i) Reserves and Surplus shall be classified as: (a) Capital Reserves; (b) Capital Redemption Reserve; (c) Securities Premium; (d) Debenture Redemption Reserve; (e) Revaluation Reserve; (f) Share Options Out

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