Unit 13-Introduction to Company Accounts PDF

Financial Accounting Unit 13 Unit 13 Introduction to Company Accounts Structure: 13.1 Introduction Objectives 13.2 Kinds of Companies 13.3 Formation of Companies 13.4 Share Capital 13.5 Issue of Shares 13.6 Under Subscription & Oversubscription 13.7 Issue of Shares at Premium & Discount 13.8 Buy bac...

Financial Accounting Unit 13 Unit 13 Introduction to Company Accounts Structure: 13.1 Introduction Objectives 13.2 Kinds of Companies 13.3 Formation of Companies 13.4 Share Capital 13.5 Issue of Shares 13.6 Under Subscription & Oversubscription 13.7 Issue of Shares at Premium & Discount 13.8 Buy back of Shares and Treasury Stock 13.9 Accounting Treatments and Ledger Preparation 13.10 Summary 13.11 Glossary 13.12 Terminal Questions 13.13 Answers 13.1 Introduction In the previous unit, you learnt the meaning and need of depreciation accounting. Depreciation means a fall in the quality, quantity or value of an asset. You have learnt that causes of depreciation are wear and tear, obsolescence and efflux of time, accident and expiry of legal rights. Important methods of depreciation are straight line method, written down value method, annuity method and sinking fund method. Revised AS-6 deals with depreciable amount, explains the effect of charging depreciation in financial statement, determination of residual value of an asset etc. A company is a voluntary association of persons formed for the purpose of some business for profit with common capital, divisible into transferable shares. A company has its own existence possessing a corporate legal entity and a common seal. In law, it exists as an individual different from its members. It is created by a process of law and can be put to an end only by a process of law. The members as such do not carry on the business of the company. It acts through a group of persons who are individually called the directors and collectively called the Board of Directors. Manipal University Jaipur B1520 Page No.: 258 Financial Accounting Unit 13 Objectives: After studying this unit, you should be able to:  list different kinds of companies  describe shares, share capital and types of share capital  explain the process of issue of shares  Pass journal entries and prepare relevant ledger accounts. 13.2 Kinds of Companies The companies in India can be classified on the basis of formation, liability of the members and public investment. Classification on the basis of formation: 1. Statutory Companies: Companies which are created by an Act of Parliament or a State legislature. E.g., State Bank of India, Life Insurance Corporation of India, Reserve Bank of India Act, 1935. 2. Registered Companies: Companies which are incorporated under the Companies Act, 1956 or under earlier Companies Acts. Classification on the basis of liability of Members: 1. Companies limited by shares: A company is said to be limited by shares when it has a share capital and the liability of its members is limited to the extent unpaid on the shares held by them. 2. Companies limited by guarantee: In these companies, the liability of the members is limited to the amount which the members undertake to contribute in the event of the winding up of the company. 3. Unlimited companies: Companies in which the liability of the members is unlimited. Classification on the basis of Public Investment: 1. Private Companies: A private company is a company which, by its articles of association, i) restricts the right of its members to transfer shares, ii) limits the number of its members to fifty excluding persons who are employees of the company and iii) Prohibits any invitation to the public to subscribe to its shares and debentures. Manipal University Jaipur B1520 Page No.: 259 Financial Accounting Unit 13 2. Public Companies: A public company is a company which is not a private company. The above mentioned conditions of private companies are not applicable in the case of public companies. Self Assessment Questions Fill in the blanks: 1. The business of a company is being carried out by ____________. 2. On the basis of liability of the members, the Companies are classified as ____________, ____________ and ________________. 3. The maximum number of members excluding persons who are employees of the company is _________ for a private company. Choose the correct answer: 4. In the case of unlimited companies, the liability of members is __________. a) Limited to the extent unpaid on the shares held by them. b) Limited to the amount which the members undertake to contribute in the event of the winding up of the company. c) Unlimited d) Limited to the extent paid on the shares held by them. 5. Companies which are created by special acts of the Legislature are___________ a. Registered companies b. Private companies c. Public companies d. Statutory companies 13.3 Formation of Companies The three important states involved in the formation of a company are promotion, incorporation and commencement of business. Promotion: A company may be formed for carrying on a new business or for absorbing an existing business concern or for amalgamating two or more business concerns. The person involved in forming a company is called promoter. Incorporation: A group of seven persons in the case of a public company and two persons in the case of a private company may, by subscribing their names to Memorandum of Association, form an incorporated company. Manipal University Jaipur B1520 Page No.: 260 Financial Accounting Unit 13 On filing the relevant documents and payment of the necessary fees, the Registrar will issue the Certificate of Incorporation, if he is satisfied that the requirements of the Companies Act have been complied with. He will enter the company’s name in the Register and company comes into existence. Commencement of Business: A private company can commence business immediately after incorporation, but a public company can commence the business only after obtaining the Certificate of Commencement of Business from the Registrar. For this purpose, a. The company has to issue a Prospectus or prepare a Statement in lieu of Prospectus signed by every director before its publication and file a copy with the Registrar. b. Shares are to be allotted to an amount equivalent to or more than minimum subscription. c. The directors have to pay to the company, on the shares taken or agreed to be taken by them. d. A duly verified declaration by a director or company secretary has to be filed with the Registrar to the effect that the conditions (a) and (b) have been complied with. Self-Assessment Questions Fill in the blanks: 6. To form an incorporated public company, a group of __________ persons should subscribe their names to Memorandum of Association. 7. The three important states involved in the formation of a company are ____________, ______________ and____________. State true or false: 8. A public company can commence business immediately after incorporation. 9. For incorporation of a company, a certificate from the Central Government for permission to the issue of capital is to be filed with the Registrar, if the nominal capital exceeds Rs.25 lakhs. Manipal University Jaipur B1520 Page No.: 261 Financial Accounting Unit 13 13.4 Share Capital The Shareholder’s equity of a company consists of three parts:  Share capital  Retained Earnings and  Other reserves Share capital means the capital raised by a company by the issue of shares. Retained earnings are the accumulated profits that have not been distributed to the shareholders but retained in the business. Divisions of Share Capital The following are the main divisions of share capital. i) Nominal or Authorized Capital: This is the nominal or face value of the shares which the company is authorized to issue by its Memorandum of Association. Wipro’s authorized capital is 1,650,000,000 Equity shares of Rs.2 each and 25,000,000 -10.25% Redeemable Cumulative Preference Shares of Rs.10 each ii) Issued Capital: It is the nominal value of the shares which are offered to the public for subscription. Wipro’s issued, subscribed and paid up capital is 1,458,999,650 Equity shares of Rs.2 each iii) Subscribed Capital: It is that part of the authorized capital which has been taken up or agreed to be taken up by the purchasers of shares of the company. iv) Called-up Capital: This is that part of the subscribed capital which has been called up. v) Paid up Capital: It represents that portion of the subscribed capital with regard to which the company has received call money from the shareholders. Classes of Shares Share capital of a company is divided into certain indivisible units of a fixed amount. These units are called shares. Each share has a distinctive number. The ownership of shares is evidenced by a share certificate that indicates the kind and number of shares as well as their distinctive serial number. The move from physical certificates to electronic form is known as dematerialization (DEMAT). The person owning a share or shares of a company is called a shareholder. There are two types of shares: Manipal University Jaipur B1520 Page No.: 262 Financial Accounting Unit 13 1. Preference Shares: Preference shares are those shares on which there is a preferential right as (a) Payment of periodic dividends (b) distribution of assets on liquidation of the company. Dividends must be paid to preference shareholders before these are paid to the equity shareholders. a. Cumulative Preference shares: If in any year, the company does not earn adequate profit, dividend on preference shares may not be paid for that year. In case of cumulative preference shares such unpaid dividend is treated as ‘dividends in arrears’. The arrears will accumulate and they will be payable out of the profits of the subsequent years. For E.g. X Ltd Co has 100,000, 10% Cumulative Preference shares with par value of Rs.10 each and if the dividends are in arrears for 3 years, the preference shareholders are entitled to receive a total dividend of Rs.400,000 before any payment is made to equity shareholders. b. Non-Cumulative Preference shares: If in any year the company does not earn adequate profit, the holders of non-cumulative preference shares get no dividend because unpaid dividend will not be carried forward to subsequent years. c. Participating Preference shares: Participating preference shares receive fixed rate of dividend and carry the right to share in the profits of the company after the equity shareholders are paid a certain rate of dividend. Let us assume X Ltd has Rs.100,000 10% par value of participating preference shares and Rs.1,000,000 (100,000 shares) Equity capital. The company pays Rs.10,000 as preference dividend and Rs.100,000 (10%) as equity dividends before the participating right takes effect. Additional dividends are distributed between the preference and equity share holders on the basis of their respective capitals (1:10). d. Non-Participating Preference shares: The holders of non-participating preference shares can only receive the fixed dividend and have no right either to participate in the surplus of profits or the assets which remain after payment to equity shareholders. e. Redeemable Preference shares: Redeemable preference shares are repayable after the period of holding stated in the share certificate. Let us assume X Ltd has issued Rs.10 par Manipal University Jaipur B1520 Page No.: 263 Financial Accounting Unit 13 value preference shares which are redeemable at Rs.12 per share. On redemption, the preference shareholder will receive (a) the par value of the share (b) the redemption premium (c) the dividends in arrears (d) the proportionate dividend for the current year. f. Irredeemable Preference shares: The amounts of preference shares which can be returned only when the company is wound up are called Irredeemable preference shares. In India, companies cannot now issue any preference shares which is nonredeemable, or is redeemable after eight years from the date of its issuance. g. Convertible Preference shares: The holders of the convertible preference shares enjoy the right to get the preference shares converted into equity shares at a pre-determined ratio. Suppose X Ltd. issued Rs.200,000 10% Rs.10 par value preference shares convertible into equity shares five years later, the conversion ratio will be one equity share of Rs.10 each for two preference share. At the end of five years the company’s 20,000 preference shares will stand converted into 10,000 equity shares of Rs.10 par value. 2. Equity Shares: Shares which are not preference shares are equity shares. These shares are also called ordinary shares. The balance of profits remaining after appropriated preference dividend can be distributed among the equity shareholders as dividend. In case of winding up of the company, the payment is first made to creditors of the company. Then the preference share capital is returned. Whatever remains belongs to equity shareholders. Self Assessment Questions Fill in the blanks: 10. _____________ is the nominal value of the shares which are offered to the public for subscription. 11. Share capital of a company is divided into certain indivisible units of a fixed amount called _____________. 12. In case of cumulative preference shares unpaid dividend is treated as ____________. 13. __________ Preference shares can be converted into equity shares according to the terms of issue. Manipal University Jaipur B1520 Page No.: 264 Financial Accounting Unit 13 13.5 Issue of Shares The terms and conditions of the issue of shares are stated in the Prospectus. The prospectus mentions the number and class of shares offered and the manner in which the amount of shares payable by the public. The procedure is controlled and regulated by the Companies Act and Securities Exchange Board of India (SEBI). The shares can be issued at par or at a premium or at a discount. A certain sum called the application money has to be paid along with the application which has to be made in a prescribed form. When the application has been accepted and the shares have been allotted, the second instalment called the allotment becomes payable. Subsequent instalments will be payable as per terms of issue and they are termed as calls and are serially numbered as first call, second call and the last instalment as the final call. Journal entries for issue of shares: 1. On receipt of application money: Bank A/c Dr To Share Application A/c 2. On allotment of shares: a. For transfer of application amount to the share capital a/c to the extent of allotment: Share Application A/c Dr. To Share Capital A/c b. For the amount due on allotment: Share allotment A/c Dr. To Share Capital A/c 3. 4. 5. c. On receipt of allotment money Bank A/c. Dr. To Share Allotment A/c On rejection of shares: Share Application A/c Dr. To Bank A/c. When the first call is due and called: Share first call A/c. Dr. To Share Capital A/c. On receipt of first call money: Bank A/c. Dr. To Share First call A/c. Manipal University Jaipur B1520 Page No.: 265 Financial Accounting Unit 13 Entries similar to 4 & 5 will be passed for subsequent calls. Separate entries for each type of share capital and the words equity or preference must invariably be used in all the circumstances like receiving application money, making allotment and calls, when the company issues both equity and preference shares. Issuance of share capital with par value When a company issues shares for cash, it credits the par value of the shares to share capital and the portion of the proceeds in excess of the par value to share premium. E.g. If the company issues the shares at Rs.15 each or at a premium the entry would be as follows: Cash Dr 15000 To Equity share capital 10000 To Share premium 5000 If the company issues share capital at a discount, it should get the approval from company law board. Let us assume X Ltd issues its shares at Rs.9.50 per share, the entry would be as follows: Cash Dr 9500 Discount on Issue of Shares Dr. 500 To Equity share capital 10000 Issuance of share capital without par value When a company issues no-par stock, it credits the entire proceeds from the issuance to the share capital account. Let us assume X Ltd issues 10000 shares of no-par value at Rs.15 per share the entry would be: Cash Dr 15000 To Equity share capital 15000 Issue of shares for consideration other than cash Sometimes shares are issued to the promoters of the company in lieu of the services provided by them during the incorporation of the company. The issue price of these shares is normally debited to ‘Goodwill A/c’ and journal entry is made as follows: Goodwill a/c Dr To Share capital In case a company does not have sufficient funds for the purchase of fixed assets or for payment to creditors it may offer and allot its shares to vendors/creditors in lieu of cash. Any allotment of shares against which cash Manipal University Jaipur B1520 Page No.: 266 Financial Accounting Unit 13 is not to be received is called ‘issue of shares for consideration other than cash’. For example, building is purchased and payment is made by issuing shares. In case of purchase of assets like building, machinery, stock of materials etc. the following journal entry is passed: 1. Assets A/c Dr To Vendors/Creditors A/c (Assets purchased) 2. Vendors/Creditors A/c Dr To Share Capital A/c (Issue of shares of Rs.……. each fully paid up) Rights Issue of Share capital When a company intends to make additional issue of share capital, the law gives the company’s existing shareholders the pre-emptive right to subscribe to the shares. This right enables them to maintain their proportion of the company’s share capital. This offer is known as rights issue. An existing shareholder who receives a rights offer may (a) not take up the rights offered to him (b) all the shares offered to him (c) take up less than the number of shares offered to him or (d) renounce his rights in favour of another person. Self Assessment Questions State true or false 14. The application money received should be at least 5% of the face value of the shares in the case of a private company. 15. The prospectus mentions the number and class of shares offered and the manner in which the amount of shares payable by the public. 13.6 Under subscription and Over Subscription of Shares A company decides to issue number of shares to raise capital. It invites application from public to buy these shares. If the company does not receive application equal to the number of shares offered for subscription, there may be two situations: (i) Under Subscription: The issue is said to have been under subscribed when the company receives applications for less number of shares than offered to the public for Manipal University Jaipur B1520 Page No.: 267 Financial Accounting Unit 13 subscription. In this case company is not to face any problem regarding allotment since every applicant will be allotted all the shares applied for. But the company can proceed with allotment provided the subscription for shares is at least equal to the minimum required number of shares termed as minimum subscription. (ii) Over Subscription When company receives applications for more number of shares than the number of shares offered to the public for subscription it is a case of oversubscription. A company cannot allot more shares than what it has offered. In case of over subscription, company has the following options: (i) Rejection of Excess Applications and Money Returned The company may reject the applications for shares in excess of the shares offered for issue and a letter of rejection is sent to such applicants. In this case the application money received from these applicants is refunded to them in full. The journal entry made is as follows: Share Application A/c To Bank A/c Dr (ii) Excess application money adjusted towards sums due on allotment. When the company accepts applications partially, the application money received can be adjusted against the allotment money. The journal entry to be passed is: Shares Application A/c To Share Allotment A/c Dr If the application money received on partially accepted applications is more than the amount required for adjustment towards allotment money, the excess money is refunded. However, if the Articles of the company so authorize, the directors may retain the excess money as calls in advance to be adjusted against the call/calls falling due later on and the following entry is made: Share Application A/c To Call-in-advance A/c Manipal University Jaipur Dr B1520 Page No.: 268 Financial Accounting Unit 13 Self Assessment Questions Fill in the blanks: 16. When the company receives applications for less number of shares than offered to the public for subscription, it is said to be ___________. 17. Shares that can be allotted by a company should not exceed what it has __________. 18. Excess application money received in the case of partial allotment of shares can be adjusted against ___________ if the Articles of Association of the company so authorizes. 19. Interest on Calls in Advance is treated as ____________ in Profit and Loss account. 20. The call money demanded by the company if not paid by a shareholder, will be debited to ____________ A/c. 21. Call in Advance A/c is shown on the __________ side of the Balance Sheet. 13.7 Issue of Shares at Premium & Discount A company can issue its shares at their face value. When company issues its shares at their face value, the shares are said to have been issued at par. Company can also issue its shares at more than or less than its face value i.e., at ‘Premium’ or at ‘Discount’ respectively. When shares are issued at premium or at discount an accounting treatment different from shares issued at par is required. Issue of Shares at Premium: If a company issues its shares at a price more than its face value, the shares are said to have been issued at Premium. The difference between the issue price and face value or nominal value is called ‘Premium’. The money received as premium is transferred to Securities Premium A/c. A company issues its shares at premium only when its financial position is very sound. It is a capital gain to the company. The Premium money may be demanded by the company with application, allotment or with calls. The Companies Act has laid down certain restrictions on the utilisation of the amount of premium. According to Section 78 of this Act, the amount of premium can be utilised for: i) Issuing fully-paid bonus shares; Manipal University Jaipur B1520 Page No.: 269 Financial Accounting Unit 13 ii) Writing off preliminary expenses, discount on issue of shares, underwriting commission or expenses on issue; iii) Paying premium on redemption of Preference shares or Debentures Further, the company may demand the total amount of premium in more than one instalment. In case the company doesn’t specify the particular call with which Securities Premium is to be paid it is supposed to be called at the time of Allotment. Following is the accounting treatment of Premium on issue of shares: a) Securities premium collected with Share Application money: Share Application A/c. Dr To Securities Premium A/c b) Premium collected with Allotment money or Calls. Share Allotment A/c Dr Or/and Share Call A/c Dr To Securities Premium A/c Issue of Shares at Discount: When the issue price of share is less than the face value, shares are said to have been issued at discount. Section 79, of Companies Act 1956 has laid down certain conditions subject to which a company can issue its shares at a discount. These conditions are as follows: i) At least one year must have elapsed from the date of commencement of business; ii) Such shares are of the same class and has already been issued; iii) The company has sanctioned such issue by passing a resolution in its General meeting and sanctioned by Company Law Board. iv) The resolution must specify the maximum rate of discount at which the shares are to be issued. Discount should not be more than 10% of the face value of the share and if the company wants to give discount more than 10%, it will have to obtain the sanction of the Central Government. v) The shares to be issued at a discount must be issued within two months after the date on which the issue is sanctioned by the Company Law Board. Manipal University Jaipur B1520 Page No.: 270 Financial Accounting Unit 13 The amount of discount is generally adjusted towards share allotment money and the following journal entry is made: Share Allotment A/c Dr Discount on issue of shares A/c Dr To Share Capital A/c Self Assessment Questions Fill in the blanks: 22. The difference between the issue price and face value or nominal value of a share is called ___________. 23. Securities premium is a _____________ to the company. 24. A company issues its shares of Rs.100 each at a discount of 10%, money receivable on each share is _____________. 25. The maximum percentage of discount that can be allowed by a company without obtaining permission from Central Government is ________. 13.8 Buy-Back of Share and Treasury Stock Companies reacquire their own shares for various reasons such as (1) when it has large surplus of cash but does not have any plans for large capital expenditure (2) when the management worry about a hostile takeover (3) when the managers believe that the company’s stock is undervalued. Let us assume that X Ltd has 10,000 shares of Rs.10 each and a balance of Rs.50,000 in the share premium account. The company decides to buy back 200 shares at Rs.25. The entry for this transaction is as follows: Equity share capital Dr.2000 Share premium Dr.3000 To cash 5000 Treasury Stock Treasury stock is a company’s own share capital that was issued and reacquired by the company as investment. It is considered as cash management activity. It may be either preference shares or equity shares and may be held for any period of time. Dividends are not paid on treasury stocks and they do not carry any voting rights. Manipal University Jaipur B1520 Page No.: 271 Financial Accounting Unit 13 13.9 Accounting Treatments and Ledger Preparation Illustration 1 A limited company issued 20000 equity shares of Rs.10 each, payable Re.1 on application, Rs.2 on allotment, Rs.2 on first call and Rs.5 on final call. All shares were subscribed and amounts duly received. Pass entries in the books of the company. JOURNAL ENTRIES Dr. (Rs.) Bank A/c To Equity Share Application A/c (Being equity shares application money received on 20,000 shares @ Re.1 per share) Equity Share Application A/c To Equity Share Capital A/c (Being equity shares application money transferred to share capital A/c) Equity Share Allotment A/c To Equity Share Capital A/c (Being equity shares allotment money due on 20000 shares @ Rs.2 per share as per the resolution of the Board of Directors) Bank A/c To Equity Share Allotment A/c (Being equity shares allotment money received on 20000 shares @ Rs.2 per share) Equity share First call A/c To Equity share Capital A/c (Being equity shares first money due on 20000 shares @ Rs.2 per share as per the resolution of the Board of Directors) Bank A/c To Equity Share first call A/c (Being equity shares first call money received on 20000 shares @ Rs.2 per share) Manipal University Jaipur B1520 Cr. (Rs). 20,000 20,000 20,000 20,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 Page No.: 272 Financial Accounting Unit 13 Equity Share second and final call A/c To Equity Share Capital A/c (Being equity shares first money due on 20000 shares @ Rs.5 per share as per the resolution of the Board of Directors) Bank A/c To Equity Share second and final call A/c (Being equity shares allotment money received on 20000 shares @ Rs.5 per share) 100,000 100,000 100,000 100,000 Illustration 2 A Ltd was registered on 15th March, 2010 with an authorized capital of 1,00,000 shares of Rs.100 each.50,000 shares were offered to the public, the issue price being Rs.110. From the following particulars, make entries in the books of the company and give ledger accounts (assuming that the books are closed on March, 31) April 5 Received application for 70,000 shares with a payment of Rs.20 per share as application money. April 20 Allotment made this day: money due on allotment Rs.40 (including premium). Applicants for 45,000 shares were allotted in full; those for 20,000 shares were allotted 5,000 shares and applications for 5,000 were rejected. The articles provide that surplus money on an application after meeting allotments was to be retained against calls to be made. May 15 Balance amount due on allotment received. Sept 1 Made call of Rs.30 per share, payable on September 30. Sept 20 Received Rs.10,52,000 against the call made. Oct 5 Received Rs.2,22,000 against the first call. Dec 1 Made call of the balance of the amount, payable on December, 31 Dec 15 Received Rs.8,50,000 against the final call. Dec 30 Received Rs.90,000 against the first call. th Jan 10 2011 Received Rs.1,10,000 against the final call. Manipal University Jaipur B1520 Page No.: 273 Financial Accounting Unit 13 Bank A/c Rs. 2010 April 5 May 15 Sept 20 Oct. 5 Dec 15 Dec 30 Jan 10 Rs. 2010 14,00,000 April 20 By Share Applications A/c To Share Application A/c (Rs.2 on 70000 shares) To share Allotment A/c (Rs.40 on 50000 shares 18,00,000 2011 31 By Balance c/d minus Rs.200000 Mar transferred from application A/c) To share first call A/c (Cash received against 10,52,000 first call) To share first call A/c (Cash received against 2,22,000 first call) To share final call A/c (Cash received against 8,50,000 final call) To share first call A/c (Cash received against 90,000 first call) To share Final Call A/c (Cash received against final call) 1,10,000 55,24,000 2011 April 1 To Balance b/d 1,00,000 54,24,000 55,24,000 54,24,000 Ledger Accounts Share Application A/c Rs. 2010 April April April April 20 20 20 20 To Share Capital A/c To Share Allotment A/c To Calls in Advance A/c To Bank A/c 2010 10,00,000 April 5 2,00,000 1,00,000 1,00,000 14,00,000 Manipal University Jaipur B1520 Rs. By Bank A/c 14,00,000 14,00,000 Page No.: 274 Financial Accounting Unit 13 Share Allotment A/c Rs. Rs. 2010 April 20 To Share Capital A/c 2010 15,00,000 April April 20 To Share Premium A/c 5,00,000 May 20 By Share Application A/c 15 By Bank A/c 2,00,000 18,00,000 20,00,000 20,00,000 Calls in Advance A/c Rs. 2010 Sept 1 To Share First Call A/c Rs. 2010 1,00,000 April 20 By Share Application A/c 1,00,000 1,00,000 1,00,000 Share First Call A/c Rs. 2010 Sept 1 To Share Capital A/c Rs. 2010 15,00,000 Sept Sept Oct Dec Mar 1 By Calls in Advance A/c By Bank 20 By Bank 5 By Bank 30 By Balance c/d 31 15,00,000 2011 April 1 To Balance b/d 1,00,000 10,52,000 2,22,000 90,000 36,000 15,00,000 36,000 Share Final Call A/c Rs. 2010 Dec 1 Rs. 2010 To Share Capital A/c 10,00,000 Dec 15 By Bank 2011 Jan 10 By Bank Mar 31 By Balance c/d 8,50,000 1,10,000 40,000 10,00,000 10,00,000 2011 April 1 To Balance b/d Manipal University Jaipur 40,000 B1520 Page No.: 275 Financial Accounting Unit 13 Share Capital A/c Rs. 2010 2011 Mar 31 To Balance c/d Rs. 50,00,000 April 20 By Share Application A/c By Share Allotment A/c April 20 By share First Call A/c By Share Final Call A/c Sept 1 Dec 1 50,00,000 2011 April 1 10,00,000 15,00,000 15,00,000 10,00,000 50,00,000 50,00,000 By Balance b/d Share Premium A/c Rs. 2011 Mar 31 To Balance c/d Rs. 2010 5,00,000 April 20 By Share Allotment A/c 5,00,000 5,00,000 5,00,000 2011 April 1 By Balance b/d 5,00,000 13.10 Summary  Companies in India are classified as statutory, registered, public, private, companies with limited shares, companies with limited guarantees and unlimited companies.  The three important stages in the formation of a company are promotion, incorporation and commencement of business. Share capital is one of the main sources of finance for a company.  The main divisions of the share capital of a company are authorized capital, issued capital, subscribed capital and paid up capital.  Share capital of a company is divided into certain indivisible units of fixed amount called shares. Face value of a share is the par value of the share. Shares are mainly classified as equity and preference shares.  Shares can be issued either for consideration other than cash or for cash. To issue shares a company follows a definite procedure which is controlled and regulated by the Companies Act and Securities Exchange Board of India (SEBI). Manipal University Jaipur B1520 Page No.: 276 Financial Accounting Unit 13  The three types of responses for the offer of the company for issue of shares are full subscription, under subscription and over subscription.  A public company cannot commence business unless shares are allotted to an amount equal to or more than ‘minimum subscription’.  A company can issue its shares at their face value. When company issues its shares at their face value, the shares are said to have been issued at par. Company can also issue its shares at more than or less than its face value i.e., at ‘Premium’ or at ‘Discount’ respectively.  The money towards the value of shares can be collected at three stages namely, application, allotment and calls on shares. When the money is received before they are demanded, it will be considered as calls in advance and similarly the calls not paid within the specified time are treated as calls in arrears. 13.11 Glossary 1) Share capital: The capital raised by a company by the issue of shares. 2) Calls on shares: A call is a demand made by the company asking the shareholders to remit the called up amount on shares allotted to them. The company may demand the remaining money in more than two instalments. The amount called after the allotment is known as call money. 3) Shares Company has offered to people. It is called full subscription. 4) Under & Over subscription: The issue is said to have been under and oversubscribed, when the company receives applications for less or more number of shares than offered to the public for Subscription respectively. 5) Share premium & Discount: Company can also issue its shares at more than or less than its face value i.e., at ‘Premium’ or at ‘Discount’ respectively. 13.12 Terminal Questions 1. 2. 3. 4. Explain the various classes of companies Define share and explain its types. Explain the various steps involved in the formation of company. What are the conditions for issue of shares under discount? Manipal University Jaipur B1520 Page No.: 277 Financial Accounting Unit 13 13.13 Answers Self 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. Assessment Board of Directors Limited by shares, limited by guarantee & unlimited fifty c (Unlimited) d(Statutory company) Seven Promotion, incorporation & Commencement of Business False True Issued Capital Shares Arrears Convertible False True Under subscription Offered Calls in Advance Expense Calls in Arrears Liability Premium Capital gain Rs. 90 10% Terminal Questions 1. Refer 13.2 2. Refer 13.4.2 3. Refer 13.3 4. Refer13.8.2 Manipal University Jaipur B1520 Page No.: 278