1.23     Query

Classification of Current Liabilities Under “Sundry Creditors” and “Other Liabilities”.

1. A drugs and pharmaceuticals manufacturing company in the public sector, has in its balance sheet, shown separately “Current Liabilities” and “Provisions” with detailed schedules annexed to and forming part of the balance sheet as Schedules No. 9 and 10. The details contained in these two schedules are as under:

            SCHEDULE-9

            Current Liabilities

            (i) Acceptances (Bills payable)

            (ii) Sundry Creditors for:

                        Suppliers

                        Services

                        Others

            (iii) Sundry Deposits from contractors & others  

                        Less: Investments received as Security Deposits.

            (iv) Due to Bank (Bank Overdraft)

            (v) Advances received from customers & others

            (vi) Interest accrued but not due on:

                        Government Loans

                        Deferred Credit

                        Others

            (vii) Other Liabilities

            SCHEDULE – 10

Provisions

            (i) Provision for Gratuity

            (ii) Provision for loss on obsolete/surplus materials

            (iii) Loss on stores and Fixed Assets

            2. Following sub-heads are grouped under the heading ‘Sundry Creditors’ and ‘Other Liabilities’ in Schedule – 9;

            Sundry Creditors

            (i) For supplies: For supplies of materials only.

            (ii) For services: Electricity & Water Charges.

(iii) For others: All expenses outstanding including salaries and dues to employees except statutory payments.

Others Liabilities

Statutory payments like amounts due for Provident Fund, Income-tax, Sales Tax, LIC Premium/club/Society deductions and any other deduction from salary.

3. Prior to the Financial Year 1985-86, the company was not having any sub-classification under the heading ‘Sundry Creditors’. The detailed sub-classification was started to satisfy the Government Audit objection, that liabilities in respect of dues to employees on account of Salaries, Bonus, D.A. Arrears etc., should be shown under ‘Other Liabilities’ and not under ‘Sundry Creditors’ since they were of the opinion that the employees are not the creditors of the company. However, with the changed detailed sub-classification also the auditors are not satisfied and the objection is still continuing.

4. In this connection, the querist has informed that the company is aware of the opinion given by the Expert Advisory Committee of the Institute as reported on page I-21 of Volume-I of Compendium of Opinions, which also appears to be in favour of the opinion of the Government Auditors, which, in turn, might be based upon the opinion of the Committee only. However, the company could not lay its hand on the provisions of the Companies Act 1913, (referred to by the Committee in its aforesaid opinion) to clarify the position.

5.The company management is not satisfied with the earlier opinion given by the Committee and has requested the Committee to give a more elaborate opinion, giving the provisions of Companies Act, 1913, on the following issues:

(i) Whether it is necessary to have the present three separate sub-heads under “Sundry Creditors”.

(ii) Whether the dues to employees fall under the category of “Other Liabilities”.

(iii) Whether classification presently being shown by the company is in any way defective and requires change as desired by the auditors.

                                                             Opinion                                              September 7, 1988

1. At the outset, the Committee states that with regard to the matter raised in the query, the provisions of the Companies Act, 1913, are not relevant now. The opinion of the Committee is, therefore, based on the relevant provisions of the Companies Act, 1956.

2.The Committee notes that Part I of Schedule VI to the Companies Act, 1956, requires disclosure of ‘Sundry Creditors’ under the head ‘Current Liabilities’. The Committee further notes that the Act does not prescribe which creditors are to be included in ‘Sundry Creditors’. The Committee is, therefore, of the view that the said term should be interpreted on the basis of its accounting and commercial usage.

3.The Committee notes that the ‘Guidance Note on Terms Used in Financial Statements’, defines the term ‘Sundry Creditor’ as “Amount owed by an enterprise on account of goods purchased or services received or in respect of contractual obligations. Also termed as trade creditor or account payable” (emphasis by the Committee).

4.On the basis of the above, the opinion of the Committee on the issues raised by the querist in para 5 of the query, is as below:

(i) It is not legally necessary to give the three sub-heads under ‘Sundry Creditors’ – the practice presently being followed by the company in question.

(ii) The dues to employees should be included in ‘Sundry Creditors’ since they are in respect of ‘contractual obligations’ which are not specifically required to be included under any other head as per Part I of Schedule VI to the Companies Act, 1956. Thus, these dues should not be included under the head ‘Other Liabilities’.

(iii) The classification presently being followed by the company in respect of ‘sundry creditors’ is not defective and, therefore, does not require any change.

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