Company Accounts

Mr. Vasim Ahmad

(Research Scholar)
 MEANING OF COMPANY
• A company may be defined as an incorporated
association which is an artificial person, having a
separate legal entity, with a perpetual succession,
a common seal, a common capital comprised of
transferable shares and carrying limited liability.
It is called an artificial person because of its very
nature that law alone can give birth to a company
and law alone can put it to an end.
TYPES OF COMPANIES
View of formation
• Chartered companies: incorporated under a special
charter by the king or sovereign.
• Statutory companies :formed by a special act of the
legislature or parliament.
• Registered companies: incorporated under the
companies act 1956.
View of liability
• Limited companies: liability of each member is
limited to the extent of the face value held by him.
• Guarantee companies: liability is limited to the
amount members have has undertaken to the assets os
the company in the event of its wound up.
 • Unlimited companies: members have unlimited
liability and both there share contribution as well as
their private property are at stake.
View of public investment
• Private companies: a company which:
(a) Restricts the right to transfer its shares, if any.
(b) Limits the number of its members to 50 excluding
past or present employees of the company who are
also the members of the company.
(c) Prohibits an invitation to the public to subscribe for
any shares or debentures of the company.
(d) prohibits any invitation or acceptance of deposits
from persons other than its members, directors and
their relatives.
• Public companies:
Companies which
[a] is not a private company
[b] has a minimum paid up capital of 5 lakhs
FORMATION OF COMPANY
Company should be registered under companies act
1956 .The following documents are to be filed with
the registrar of d joint stock companies of the state
in which the registered office of the company is to be
situated:
(a) Memorandum of association
(b) Articles of association
(c) Statement of nominal capital
(d) A list of directors
(e) Written consent of the directors
(f) Notice of address of the registered office
(g) Statutory declaration
TYPES OF SHARE CAPITAL
• Nominal or registered or authorized capital:
amount of the capital with which the company is
registered.
• Issued capital: that part of authorized capital
which is offered to the public for subscription.
• Subscribed capital: that part of issued capital for
which applications are received from the public.
• Called up capital: amount on the shares which is
actually demanded by the company to be paid.
• Paid-up capital: the part of the called up capital
which is offered and is actually paid by the member.
• Reserve capital: the portion of the share capital
which has not been already called up and shall not
be capable of being called up except in the event of
winding up of the company.
SHARES vs.STOCK
BASIS SHARE STOCK

PAID UP fully paid up or partly paid Fully paid up

up
TIME OS ISSUE Issued when company is Cannot be issued under
incorporated such circumstances
TERMS OF ISSUE Cannot be issued in Can be issued in fractions
fractions
NUMBERING Are serially numbered Not numbered

NOMINAL VALUE They have equal nominal May be divided into

value unequal amounts
REGISTRATION Are always registered May be registered or
unregistered
TRANSFER Not transferable by mere Can be transferred by
delivery mere delivery
TYPES OF SHARES
• Preference shares: shares which enjoy the preferential
rights as to dividend and repayment of capital in the event of
winding up of the company over the equity shares.
• Cumulative preference shares: these are the shares in
which the unpaid dividends are treated as arrears and can be
forwarded to subsequent years. Such unpaid dividends on
these shares go on accumulating and become payable after the
profits of the company in the subsequent years.
• Non cumulative preference shares :They does not get
any dividend for the year in which the company has earned
profits and they cannot claim it in the next year during which
period there might be profit. If it is not paid it cannot be
carried forward.
• Redeemable preference shares: these are the shares in
which the capital raised through their issue is to be paid back
by the company to such share holders after the expiry of the
stipulated period whether the company is wound up or not.
• Participating or non preference shares :
the preference shares which are entitled to share
in the surplus profit of the company in addition
to the fixed rate of preference dividend are called
participating preference shares and those
[preference shares which do not carry to write of
share in excess profits are known as non-
participating preference shares.
• Equity shares: the shares on which there is no
fixed rate of dividend. They will get dividend and
repayment of capital after meeting the claims of
preference share holders.
BOOK BUILDING
• A technique used for marketing a public offer of equity shares
of a company
• A way of raising more funds from the market.
• According to SEBI GUIDELINES 2000
• A process by which demand for the securities proposed to be
issued by a body corporate is elicited and built up and the
price for such securities is assessed for the determination
• Of the quantum of such securities to be issued by means of a
notice, circulars, advertisement, document or information
memoranda or offer document.”
OBJECT
• To arrive at a fair pricing of the issue which is supposed to
emerge out of offers given by various large investors like
mutual funds and institutional investors.
ADVANTAGES OF BOOK BUILDING
• it allows for price and demand discovery
• the cost of issue is much more than other
traditional methods of raising capital
• the time taken for completing the entire process
is much less that of normal public issue.
• the demand for shares in book building is known
before the issue closes.
• EMPLOYEES STOCK OPTION SCHEMES:
The option given to the whole time directors,
officers or employees of a company, which gives
such directors, officers or employees the benefit or
right to purchase or subscribe at a future date, the
securities offered by the company at a pre-
determined price.
Companies Amendment Act, 2000, new clause
15A in Section 2 of Companies Act 1956.

EMPLOYEES STOCK PURCHASE SCHEME:

It is scheme under which the company offers
shares to its employees as part of a public issue or
otherwise.
SWEAT EQUITY SHARES
• Equity shares issued at a discount or for consideration
other than cash for providing know-how or making
available rights in the nature of intellectual property
rights or value additions by whatever name called.
• A company may issue sweat equity shares of a class of
shares already issued, if the following conditions are
fulfilled:
(a) The issue of sweat equity shares is authorized by a
special resolution passed by the company in the
general meeting.
(b) The resolution specifies the number of shares,
current market price, the consideration if any, and the
class or classes of directors or employees to whom
such equity shares are to be issued.
(c) Not less than one year has, at the time of issue,
elapsed since the date on which the company was
entitled to commence business.
(d) The sweat equity shares of the company, whose
equity shares are listed in a stock exchange, are
issued in accordance with the regulations made by
the Securities Exchange Board of India in this
behalf.
 JOURNAL ENTRIES FOR ISSUE OF
SHARES
(1) On receipt of application money
Bank A/c Dr.
To Share Application A/c
(being the application money on …..shares @ Rs…
per share)

(2) On allotment of shares

(a) Share Application A/c Dr.
To Share Capital A/c
(being the application money transferred to Share
Capital A/c)
(b) Share Application A/c Dr.
To Bank A/c
(being the application of shares returned)

(3) Allotment money becoming due

Share Allotment A/c Dr.
To Share Capital A/c
(being the share allotment money due on …..
Shares @ Rs…. per share as per resolution dated ….)

(4) On receipt of allotment money

Bank A/c Dr.
To Share Allotment A/c
(being the receipt of allotment money)
(5) To make the first call due from shareholders
Share First Call A/c Dr.
To Share Capital A/c
(being the first call money due on …. Shares @ Rs….
per share as per resolution of the directors dated…….)

(6) Receipt of the first call money

Bank A/c Dr.
To Share First Call A/c
(being share first call money on ……shares @ Rs….
per share received)

Similar entries are passed for second call, third call and
final call, if any.
SECURITIES PREMIUM

• The purposes for which the securities premium account

may be applied by the company are:
(1) For the issue of fully paid bonus shares to the members
of the company.
(2) For writing off preliminary expenses of the company.
(3) For writing off the expenses of the commission paid or
discount allowed on any issue of shares or debentures
of the company.
(4) For providing premium payable on the redemption of
any redeemable preference shares or debentures of the
company
(5) For the buy-back of shares i.e. purchase of its own
shares.
JOURNAL ENTRIES FOR ISSUE OF
SHARES AT PREMIUM
(a) If the application is paid with application money:
(1) Bank A/c Dr.
To Share Application A/c
(being share application money along with
premium received)
(2) Share Application A/c Dr.
To Share Capital A/c
To Securities Premium A/c
(being application money transferred to share
capital A/c and securities premium A/c)
 (b) If the securities premium is received alongwith the
allotment money:
(1) Share Allotment A/c
To Share Capital A/c
To Securities Premium A/c
(being the allotment money and securities premium
money due on ….. shares)
(2) Bank A/c Dr.
To Share Allotment A/c
(being the receipt of allotment along with share
premium account)

(c) If securities premium is to be received along with

different calls, then it will be credited to Securities
Premium Account at the time of passing the due
journal entry.
DISCOUNT
Shares cannot be issued at discount if:
• It is a new company
• Shares issued are of a new class even though
issued by an old company.
JOURNAL ENTRIES FOR ISSUE OF
SHARES AT DISCOUNT
• Share Allotment A/c Dr.
Discount on Issue of Shares A/c Dr.
To Share Capital A/c
(being shares issued at a discount)
FORFEITURE OF SHARES
• When a shareholder fails to pay calls, the
company, if empowered by its articles, may
forfeit the shares.
• Forfeiture of shares brings about compulsory
termination of membership and the company
takes away the shares from member by way of
penalty for non payment of allotment and/or call
money.
JOURNAL ENTRIES FOR THE FORFEITURE
OF SHARES
• Share Capital A/c Dr.
Securities Premium A/c Dr.
To Unpaid Calls A/c
To Discount on Issue of Shares A/c
To Shares Forfeited A/c
(being shares forfeited)
 REISSUE OF FORFEITED SHARES
(1) Bank A/c Dr.
Discount on Issue of Shares A/c Dr.
Shares Forfeited A/c Dr.
To Share Capital A/c
To Securities Premium A/c
(being reissue of forfeited shares)

(2) Shares Forfeited A/c Dr.

To Capital Reserve A/c
(being profit on reissue of shares transferred to
capital reserve)
FORFEITURE OF SHARES IN CASE OF OVER
SUBSCRIPTION AND PRO RATA ALLOTMENT
Following procedure is adopted in such a case:
(1) Total number of shares applied for on the basis of
allotted shares is calculated.
(2) Total amount received on application is calculated by
multiplying the number of shares applied with
application money from the total money receivable
on application.
(3) Deduct the amount due on application and allotted
shares and balance is calculated.
(4) Amount due on such shares is calculated.
(5) Deduct the amount already received as advance on
application.
(6) Amount in arrears on allotment is obtained and
credited to share allotment a/c at the time of
forfeiture of shares.
EMPLOYEE STOCK OPTION PLAN(ESOP)
• Right to an employee to purchase the shares of a
company at a predetermined price.
• Employee includes:
permanent employee of the company working in
India or out of India or a director of the company or an
employee of a subsidiary or a holding company of the
company.
• employee is required to exercise the option of purchase
of shares within investing period, i.e. within the time in
which the scheme remains in operation.
• Shares issued under this scheme shall have locked in
period of one year from the date of allotment.
 ILLUSTRATION
• Mukesh Finance Ltd. Issued for public subscription
50,000 equity shares of Rs.10 each at a premium of
Rs.2 per share as follows:
On application Rs.5 per share,
On allotment Rs.3 per share including premium
On first call Rs.2 per share
On final call Rs.2 per share.
Applications were received for 80,000 shares.
Allotment was made on the following basis:
(a) To applicants for 10,000 shares in full
(b) To applicants for 50,000 shares 30,000 shares.
(c) To applicants for 20,000 shares 10,000 shares.

All excess money paid on application was to be

adjusted against amount due on allotment and calls.
All the money except the following was received:
(a) Sanjay (out of group applying for 50,000 shares) to
whom 300 shares were allotted, failed to pay the two
calls.
(b) Pramod (out of group applying for 20,000 shares)
who applied for 400 shares failed to pay the final call.

All the shares on which calls were not paid were

fortified by the directors. Of the shares forfeited 400
shares were reissued as fully paid to Mr. Milind for
Rs.9 per share, the whole of Sanjay’s shares being
included.

Pass the necessary journal entries in the books of the

company.
SOLUTION
DATE PARTICULARS LF DEBIT CREDIT
AMOUNT AMOUNT
Bank A/c Dr. 4,00,000
To Share Application A/c 4,00,000
(being application money received)
ShareIn the books
Application A/c of Mukesh Dr. Finance Ltd.
4,00,000
To Share Capital A/c 2,50,000
JOURNAL
To Share Allotment A/c ENTRIES 1,20,000
To Calls in Advance A/c 30,000
(being adjustment of share application
amount)

Share Allotment A/c Dr. 1,50,000

To Share Capital A/c 50,000
To Securities Premium A/c 1,00,000
(being allotment amount due
Bank A/c Dr. 30,000
To Share Allotment A/c 30,000
(being balance of allotment money
received)
Share First Call A/c Dr. 1,00,000
To Share Capital A/c 1,00,000
(being 1st call money due)

Bank A/c (1) Dr. 69,500

Calls in Advance A/c Dr. 30,000
To Share First Call A/c 99,500
(being receipt of balance of call money)

Share Final Call A/c Dr. 1,00,000

To Share Capital A/c 1,00,000
(being the amount of final call due)

Bank A/c Dr. 69,500

Calls in Advance A/c Dr. 30,000
To Share Final Call A/c 99,500
(being receipt of final call)

Share Capital A/c(500 x Rs.10) Dr. 5,000

To Share First Call A/c 500
To Share Final Call A/c 1,000
To Shares Forfeited A/c 3,500
(being forfeiture of shares)
Bank A/c Dr. 3,600
Shares Forfeited A/c Dr. 400
To Share Capital A/c 4,000
(being reissue of forfeited shares)
Shares Forfeited A/c Dr. 2,300
To Capital Reserve A/c 2,300
(being profit on reissue of forfeited
shares transferred to Capital
Reserve A/c)
 WORKING NOTES:
(1) Pro rata calculations for Mr. Sanjay and amount received on
first call
No. of shares allotted=300 shares
No. of shares applied=500 shares
Amount received on application(500 x Rs.5) =Rs 2,500
Less:Amount due on application(300 x Rs.5)=Rs.1,500
Excess application money to be adjusted on
allotment =Rs.1,000
Less:Amount due on allotment =Rs. 900
Excess application money to be adjusted on
first call =Rs. 100
Amount due on first call =Rs. 600
Less:Excess application adjusted =Rs. 100
Not received on first call =Rs. 500

Amount received on first call = Rs.1,00,000-Rs.30,000-Rs.500

=Rs.69,500
(2) Calculation Table:
(3)Calculation of Capital Reserve A/c:
Amount received from Sanjay(Rs.2,500-Rs.600)
1,900
Proportionate amount on 100 shares of Pramod
(Rs.2,000-Rs,400)/2
800

2,700
Less : Loss on reissue of forfeited shares
400
Capital reserve A/c
2,300