Meaning and Definition of Company
A company is a voluntary association of many persons.
It is an artificial person recognized by law with a distinctive name, a common
seal, a common capital and having perpetual succession.
Indian Companies Act 1956 defines a company as “Company
formed and registered under this Act or an existing company”
Characteristics of a company
Refer above
Types of companies: - can be classified --
A. On the basis of
incorporation
1. Chartered company:-incorporated
under a special charter by the Head of the State
2. Statutory company:-created
by special Act in Parliament. Eg: SBI, RBI, LIC
3. Registered company:
- formed and registered in India
with the Registrar of Companies under the provisions of the Companies Act
B. On the basis of
liability of members
1. Company limited by
shares: - here the members’ liability is limited to the extent of value
of shares held by them
2. Company limited by
guarantee: - liability of member is limited to the amount of guarantee
stated in the memorandum
3. Unlimited company:
- liability of member is unlimited
C. On the basis of public
interest
1. Private company:
A private company is one which by its Articles,
a) Limits the number of members to 50
b) Prohibits the invitation to the public to subscribe
its shares or debentures &
c) Restricts the transferability of its shares.
2. Public company:
- one which is not a private company
Minimum Subscription
It is the minimum amount of capital fixed by the
directors to be raised from the members by way of subscription. It must be
stated in the Articles of Association and Prospectus. No allotment of shares
can be made unless the minimum subscription is realized from the applicants of
shares.
The amount of minimum
subscription must cover the following:
1. The purchase price of any
property purchased or to be purchased which is to be met out of the proceeds of
the issue.
2. Preliminary expenses
payable by the company.
3. Commission on shares
payable by the company.
4. Repayment of loans taken
by the company in respect of the above mentioned matters.
5. Working capital
Share Capital
The capital of a company known as share capital and is
divided in to different units with definite value called shares. The main
divisions of share capital are:
1.
Nominal or Registered or Authorized Capital: - the capital with which
accompany is registered is called the authorized capital. It is the maximum
amount of capital that a company can issue.
2. Issued capital: - part of authorized capital which is
offered to the public for subscription. Remaining part is unissued capital
3. Subscribed capital: - part of issued capital for
which applications are received from the public. Remaining part is unsubscribed
capital
4. Called up capital: -The amount on the shares which is
actually demanded by the company to be paid
5. Paid up capital: -part of called up capital which has
actually been paid up by the shareholders. The sum still to be paid is known as
calls in arrears
6. Reserve capital: - that portion of the uncalled capital
which is kept in reserve and which will be called up only on winding up of the
company. A limited company by passing a special resolution may set apart a
portion of the uncalled capital as reserve capital
Types of shares: can be classified in to Preference Shares
and Equity Shares
Preference Shares:
-those shares which carry preferential right in respect of payment of dividend
and repayment of capital in the event of winding up. The rate of dividend on
preference share is fixed. This dividend is payable before any dividend is paid
on equity shares. Preference share may of the following types:
1. Cumulative Preference
Shares: In the case of this type of shares, the arrears of dividend, if
any, are carried forward and paid out of the profits of subsequent years
2. Non- Cumulative
Preference Shares:
3. Participating Preference
Shares: In addition to fixed rate of dividend, these shares have the right
to participate in the surplus profit left after paying a reasonable rate of
dividend on equity shares
4. Non-Participating Preference Shares: These shares get only
fixed rate of dividend
5. Redeemable Preference
Shares: - are repayable after the expiry of the fixed period or at the
option of the company.
6. Convertible Preference
Shares: These shares are given right of conversion into equity shares
within a specified period or at a specified date according to the terms of
issue.
Equity Shares (ordinary
shares)
Equity shares are those which are not preference
shares. They do not carry any preferential right in respect of dividend or repayment
of capital. Dividend is paid after the payment on preference shares. The rate
of dividend is not fixed. Equity shareholders get full voting power.
Sweat Equity Shares
These are equity shares issued by the company to employees
or directors 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.
Stock
It is a consolidation of fully paid shares. Lord Hatherly
defines “Stock is a set of shares put together in a bundle” It has no definite
value
Differences between Stock
and Shares
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Share
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Stock
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1. It has a face
value
2. It may be fully
paid or partly paid
3. It can issued
directly
4. It has a
distinctive number
5. In cannot be
issued or transferred in fractions
6. It can be issued
by any company
7. It is always
registered
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1. It has no face
value. It can be of any denomination
2. It is fully paid
3. It cannot be
issued directly
4. It has no such
number
5. It can be transferred
in fractions subject to a minimum value
6.Only limited
companies can convert shares into stock
7. It may be
registered or unregistered
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Issue of Shares
The shares of a company issued in three ways:
a) By private placement
of shares: -issue of securities of a company direct to one investor or
a small group of investors. Investors are financial institutions, other
companies, friends or relatives. In this case no prospectus is issued.
b) By right issue of
shares –It is an issue of shares to the existing shareholders in
proportion to their existing shareholding. In a right issue no prospectus is
issued.
c) By public issue of
shares:- means selling of shares or securities to public by issue of
prospectus. Public issue is of two types- i) initial public offer and ii) offer
for sale
Shares Payable by
Installments: Usually the company receives the price of securities in
installments. A part of the price is received along with application-termed
as application money. Another part is received at the time of allotment
of shares-termed as allotment money. The balance is generally
demanded from the shareholders either in full or in installment. Each
installment is called a call. Calls may be termed as first
call, second call etc and the last call is termed as final call
Accounting treatment: A
company can issue shares in the following two ways:
1. For cash 2. For consideration other than cash
Journal Entries for Issue
of Shares for Cash
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1. On receipt of application money
Bank A/c Dr
To
Share application
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2. On acceptance of application
Share application
To
Share capital
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3. On making allotment due
Share allotment
To
Share capital
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4. On receipt of allotment money
Bank
A/c Dr
To
Share allotment
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5. On making first call
Share
first call
To
Share capital
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6. On receipt of first call money
Bank
A/c Dr
To
Share first call
(Similar entries may be made for the second and
third call)
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Shares can be issued in any of the following three ways:
1. At par 2). At
premium 3). At discount
Issue of Shares at Par: When
shares are issued at a price equal to their nominal value, it is called issue
of shares at par
Issue of Shares at a
Premium: When shares are issued at a price higher than their face value, it
is called issue of shares at a premium. The premium amount is a capital
receipt. It should be credited to Security Premium Account and shown on
the liability side of Balance Sheet.
According to Companies Act, the security premium may be
applied only for the following purposes:
i) To issue fully paid bonus
shares to the shareholders
ii) To write off preliminary
expenses of the company
iii) To write off the
expenses of the commission paid or discount allowed on issue of shares or
debentures of the company
iv)To provide premium payable
on the redemption of any redeemable preference shares or debentures of the
company.
Journal entries (Accounting Treatment)
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a) When premium is
payable with application money
1. Bank A/c Dr
(with the total)
To Share application
2. Share
application A/c
Dr (with the total)
To Share capital (with application money)
To Security Premium A/c (with premium)
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b) When premium is payable with allotment
money
To Share capital (with allotment money)
To Security Premium A/c (with premium)
2.Bank
A/c Dr (with the total)
To Share allotment
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Note: If
nothing is specified premium is deemed to have been received with allotment
money
Issue of
Shares at a discount
When shares are issued at a
price lower than their face value, it is called issue of shares at discount.
Discount on issue of shares is a capital loss. Hence it should be debited to “Discount
on Issue of Shares Account” and shown on the Assets side of the Balance
Sheet. A company can issue shares at a discount subject to the following
conditions:
1. The rate
of discount should not exceed 10% of the nominal value of shares.
2. The
share must belong to a class already issued.
3. The
issue must be authorized by an ordinary resolution in general meeting.
4. The
issue must be sanctioned by the Company Law Board
5. One year
must have elapsed since the date at which the company was allowed to commence
business.
6. The
issue must be completed within two months from the date of the sanction of the
Company Law Board or within such extended time as the Company Law Board may
allow
Usually the discount on
issue is recorded at the time allotment:
The entry is:
Share
Allotment A/c
Dr (with the allotment money due)
Discount on Issue of Shares A/c Dr (with discount on issue)
To Share
Capital (with
total)
Under
Subscription of Shares: When the
applications received for shares is less than the number of shares issued, it
is under subscription. In such a case, the allotment will be equal to the
number of shares subscribed and not to the shares issued.
Over
Subscription of Shares: When applications received for shares is more than
the number of shares issued, it is called over subscription. In such case the
company allots shares only up to the number of shares issued. Under such a
situation company may reject some applications altogether, allots in full on
some applications and makes pro-rata allotment on some applications.
Pro-rata means
proportionately. Pro-rata allotment means that allotment on every
application is made in the ratio which the number of shares allotted bears to
number of shares applied
Accounting
Treatment (Journal Entries)
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1. When application
money returned
Share Application A/c Dr
To Bank
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2. When excess
application money is adjusted towards allotment or call
Share
Application A/c
Dr (with the total)
To Share Allotment (with the sum
adjusted towards allotment)
To Call (if any) (with the sum adjusted towards
call)
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Calls in
Arrears: refer to the amount called up by the company but not paid by the
shareholders. In short these are unpaid calls. Directors are authorized to
charge interest on calls in arrears at a rate specified in the Articles. If
nothing is specified, they can charge at a rate not exceeding 5% p.a
Calls in
Advance: refer to the amount paid by the shareholders in advance of it
becoming due. The company must pay interest in calls in advance at a rate
specified in the Articles. If the Articles is silent, the company is liable to
pay interest @ 6% p.a from the date of receipt to the due date
Journal
entries in respect of calls in advance
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1. When the company
receives calls in advance
Bank A/c Dr
To calls in advance
A/c
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2. When the call really
becomes due
Calls in advance
To Call A/c
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Forfeiture of Shares:
simply means cancellation of shares due to non-payment of allotment money or
call money within a specified period. The shareholder whose shares have been
forfeited ceases to be member of the company. The company does not refund the
amount he has already paid to the company.
Journal Entries
Share Capital A/c Dr
(with the amount called up)
Security Premium A/c Dr
(with the unpaid amount of premium)
To Share Allotment (with the unpaid
amount on allotment)
To Share Call (with the unpaid amount on call)
To Discount on Issue of Shares A/c (if shares
are issued at discount)
To Forfeited Shares A/c (with the amount paid excluding premium)
Note: Security Premium A/c should be debited only
when an entry has already been passed for security premium when it becomes due
Re-issue of Forfeited
Shares: If the Articles permit, the company can re-issue the forfeited
shares at par, at premium, or at discount. But the discount on re-issue should
not exceed the amount forfeited.
Accounting Treatment (Journal
Entries)
Bank A/c
Dr (amount received on
re-issue)
Discount on Issue of Shares A/c Dr (with the amount of original discount if the
Shares originally were issued at discount)
Forfeited Shares A/c Dr
(with the discount or loss on re-issue)
To Share Capital A/c (with the
amount credited as paid up)
To Security Premium A/c
(with the amount of premium on re-issue)
If all forfeited shares have been re-issued, the credit
balance left in the Forfeited Shares A/c being capital profit will be
transferred to Capital Reserve A/c by passing the following journal entry:
Forfeited Shares A/c Dr
To Capital Reserve A/c
If only a part of the forfeited shares have been
re-issued, only the profit on shares which have been re-issued is transferred
to Capital Reserve A/c.
Forfeiture and Re-issue of
Shares when there is Over-subscription and Pro-rata Allotment: in this case
following procedures may be adopted-
1. Calculate total number
of shares applied for
2. Calculate the
application money paid by the defaulter
3. Calculate actual
application money due on allotted shares
4. Calculate excess
application money to be adjusted towards allotment
5. Calculate the amount
due on allotment or call
6. Calculate the unpaid amount
Surrender of Shares: When
a shareholder finds that he cannot pay the call money on shares held by him, he
may voluntarily return his shares to the company. Such voluntary return of
shares to the company by the shareholder is called surrender of shares. The
accounting treatment will be the same as that of forfeiture. The shareholder
does not get back the amount already paid by him.
Issue of Shares for Consideration
other than Cash (Journal entries)
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a. When property is acquired
Property or
Asset A/c Dr (with cost)
To
Vendor
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b. When shares are
issued in exchange for the value of property
Vendor
A/c Dr
Discount
on
To
Share Capital (face value)
To Security Premium A/c (in case of premium)
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Lien on Shares: It is
the right of the company to retain the possession of shares for the debts due
by the member to the company.
Right
Shares: According to Section 81 (1) of the Companies Act, when the company
wants to increase the subscribed capital by issue of further shares, such
shares must be issued first of all to existing shareholders in proportion to
their existing shareholding. These share are called Right Shares
Value of Right: is the
excess of market price over average price in respect of right shares
Value of right =Market Price – Average price
Or
Fresh right shares ÷ (fresh + existing) shares X
(market price – issue price)
Adopted from books of Financial Accounting
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