Company Account (B.Com Hons) Notes ||UNIT 4||

Unit-IV : Company Account

Structure of Share Capital

 Definition of Share Capital

Share capital refers to the amount of money that a company raises by issuing shares to investors. It represents the funds contributed by shareholders to the company in exchange for ownership rights and is a key component of a company's capital structure.

Types of Share Capital

The structure of share capital can be categorized as follows:

1. Authorized Capital (Nominal Capital)

   • The maximum amount of share capital that a company is authorized to raise as per its Memorandum of Association (MoA).
   • The company cannot issue shares beyond this limit unless the MoA is amended.
   • Example: A company’s authorized capital may be ₹50,00,000.

2. Issued Capital

   • The portion of authorized capital that the company offers to investors through the issuance of shares.
   • It is not necessary for a company to issue its entire authorized capital.
   • Example: If a company’s authorized capital is ₹50,00,000, it may issue shares worth ₹30,00,000.

3. Subscribed Capital

   • The part of issued capital that investors agree to purchase and for which applications have been received.
   • Subscribed capital can be equal to or less than the issued capital.
   • Example: Out of ₹30,00,000 issued capital, investors may subscribe to ₹25,00,000.

4. Called-up Capital

   • The portion of subscribed capital that the company has demanded (called) from shareholders to be paid.
   • Companies may call for the capital in installments.
   • Example: If the face value of a share is ₹10, and ₹5 is called, then the called-up capital is calculated accordingly.

5. Paid-up Capital

   • The actual amount received by the company from shareholders in response to the call for capital.
   • Paid-up capital is always less than or equal to the called-up capital.
   • Example: If ₹25,00,000 is called up and ₹20,00,000 is paid, the paid-up capital is ₹20,00,000.

6. Uncalled Capital

   • The portion of subscribed capital that has not yet been called by the company.
   • It represents potential future inflows if required by the company.
   • Example: If ₹25,00,000 is subscribed but only ₹15,00,000 is called, the uncalled capital is ₹10,00,000.

7. Reserve Capital

   • A portion of uncalled capital that a company resolves to call only in case of liquidation.
   • This ensures some funds are available to meet liabilities during winding up.

Importance of Share Capital Structure

1. Ownership and Control: Defines the ownership stake and voting rights of shareholders.
2. Source of Funds: Provides a permanent source of capital for business operations.
3. Financial Stability: A well-structured share capital enhances investor confidence and creditworthiness.
4. Legal Compliance: Ensures transparency and regulatory adherence in raising and managing funds.

Definition of Issue of Shares

The Issue of Shares refers to the process by which a company allocates new shares to raise capital for business operations, expansion, or other financial needs. These shares represent ownership in the company and provide shareholders with certain rights, such as voting and dividends.

Types of Shares

1. Equity Shares:

   • Represent ownership in the company.
   • Provide voting rights.
   • Dividends are not fixed and depend on the company's profit.

2. Preference Shares:

   • Fixed rate of dividend.
   • Priority over equity shareholders in dividend payment and repayment during liquidation.

Methods of Issue of Shares

1. Public Issue: Shares are offered to the general public through a prospectus.
2. Private Placement: Shares are sold to select individuals or institutions.
3. Right Issue: Shares are offered to existing shareholders at a discounted price.
4. Bonus Issue: Free shares are issued to existing shareholders out of reserves or profits.
5. Employee Stock Option Plan (ESOP): Shares are issued to employees as part of compensation.

Procedure for Issue of Shares

1. Authorization: Ensure share capital is authorized in the company's Memorandum of Association (MOA).
2. Approval: Get approval from the Board of Directors.
3. Preparation of Prospectus: Provide details about the company and the issue.
4. Filing with SEBI: For public issues, approval from SEBI (Securities and Exchange Board of India) is mandatory.
5. Subscription: Shares are allotted to applicants based on their subscription.

Terms Associated with Issue of Shares

1. Par Value (Face Value): The nominal value of a share, stated in the company's charter.
2. Premium: When shares are issued at a price higher than the face value.
3. Discount: When shares are issued at a price lower than the face value (rare and needs legal approval).

Advantages of Issuing Shares

1. Capital Generation: Helps raise large amounts of capital.
2. No Repayment Obligation: Unlike loans, there is no requirement to repay the capital raised.
3. Risk Sharing: Ownership and risk are distributed among shareholders.

Forfeiture of Shares

Definition:
The forfeiture of shares refers to the cancellation of shares by the company due to non-payment of allotment or call money by the shareholder within the stipulated time. The shareholder loses ownership and rights over the shares.

Key Features:

1. Forfeiture is initiated as per the terms of the Articles of Association.
2. It is a penalty for default in payment.
3. Forfeited shares are removed from the shareholder's account.
4. The shareholder loses all rights, including dividends and voting rights.

Procedure:

1. Notice to Shareholder: The company sends a notice demanding the due payment within a specified time.
2. Resolution by the Board: If payment is not made, the Board of Directors passes a resolution to forfeit the shares.
3. Recording in the Register: The forfeiture is recorded in the company's register of members.

Accounting Treatment:

• Debit: Share Capital Account (for the called-up amount).
• Credit: Forfeited Shares Account (for the amount received) and Calls in Arrears Account (for the unpaid amount).

Reissue of Forfeited Shares

Definition:
Reissue of shares means the sale of forfeited shares to new or existing shareholders, generally at a price lower than the original issue price.

Key Features:

1. Forfeited shares can be reissued at any price, but the total amount received (including forfeited amount) should not exceed the original issue price.
2. Reissued shares regain the status of fully paid-up or partly paid-up shares.

Procedure:

1. The company fixes a price for reissue.
2. The Board of Directors passes a resolution for reissue.
3. Shares are reissued to new shareholders.

Accounting Treatment:

• Debit: Bank Account (amount received on reissue).
• Debit: Forfeited Shares Account (if there is a discount on reissue).
• Credit: Share Capital Account (amount reissued).

Surplus (Capital Reserve):
If the total amount received on reissue (including forfeited amount) exceeds the nominal value of shares, the surplus is transferred to the Capital Reserve Account.

Key Points to Remember

1. Forfeiture and reissue are governed by the Articles of Association and company law provisions.
2. Shares once forfeited cannot be restored to the original shareholder.
3. Reissue of shares ensures that the company recovers unpaid amounts and maintains capital.

Redemption of Preference Shares

Definition:

The redemption of preference shares refers to the process by which a company repays the amount of preference shares to its shareholders in accordance with the terms of issue and legal provisions.

Key Features of Redeemable Preference Shares:

1. Non-Equity Shares: These shares have fixed dividends and do not represent ownership.
2. Fixed Tenure: Issued for a specific period, after which they are redeemed.
3. Priority in Payment: Holders get priority in repayment over equity shareholders during liquidation.

Methods of Redemption:

1. Out of Profits:
   • Transfer an amount equal to the nominal value of redeemed shares to the CRR.
   • Maintains the capital structure of the company.
2. Out of Fresh Issue:
   • New shares are issued, and proceeds are used for redemption.

Journal Entries:

1. When transferring profits to CRR:

 

           Profit and Loss A/c   Dr.

                        To Capital Redemption Reserve A/c

2. When redeeming shares:

             Preference Share Capital A/c   Dr.

                           To Bank A/c

3. If issuing new shares:

              Bank A/c   Dr.

                           To Equity Share Capital A/c

Importance of Redemption:

• Ensures financial discipline.
• Improves capital structure.
• Provides a way to return surplus funds to shareholders.

Issue of Debentures 

Definition:
Debentures are a type of long-term debt instrument issued by a company to raise funds. A debenture is essentially a loan certificate or bond acknowledging that the company has borrowed money from investors and promises to pay back the principal along with interest within a specified time period.

Debentures are generally issued under a company’s seal and specify terms like interest rate, maturity period, and repayment schedule.

Key Features of Debentures:

1. Long-Term Borrowing: Debentures are used to raise funds for long-term projects or investments.
2. Fixed Interest Rate: Debenture holders are entitled to a fixed interest rate, payable at regular intervals.
3. No Ownership Rights: Unlike shareholders, debenture holders do not have ownership rights in the company.
4. Secured or Unsecured: Debentures may be secured by assets of the company or unsecured, depending on the terms of issue.
5. Tradable: Most debentures can be traded on stock exchanges.

Types of Debentures:

1. Secured and Unsecured Debentures:

   • Secured: Backed by the assets of the company.
   • Unsecured: Not backed by assets (rely on the creditworthiness of the company).

2. Convertible and Non-Convertible Debentures:

   • Convertible: Can be converted into equity shares after a specified period.
   • Non-Convertible: Cannot be converted into equity shares.

3. Redeemable and Irredeemable Debentures:

   • Redeemable: Repaid on a specified date.
   • Irredeemable: No fixed repayment date (rarely used today).

4. Registered and Bearer Debentures:

   • Registered: Issued in the name of specific holders and recorded in the company's register.
   • Bearer: Freely transferable without registration.

Methods of Issuing Debentures:

1. Public Issue: Debentures are offered to the public through a prospectus.
2. Private Placement: Offered to a select group of investors.
3. Issue as Collateral Security: Debentures are issued to lenders as additional security for a loan.
4. Issue at Premium/Discount/Par:
   • Premium: Issued at a price higher than face value.
   • Discount: Issued at a price lower than face value.
   • Par: Issued at face value.

Advantages of Issuing Debentures:

• Cost-effective source of long-term finance.
• No dilution of ownership.
• Fixed interest rates provide predictability.
• Can be secured, lowering risks for investors.

Disadvantages of Issuing Debentures:

• Regular interest payments, even in financial difficulty.
• Redemption creates a financial burden.
• Limits the company's borrowing capacity for the future.

Redemption of Debentures 

Redemption of debentures refers to the repayment or discharge of the liability created by debentures by the issuing company. It signifies the process of returning the principal amount along with any agreed-upon interest to the debenture holders, as per the terms specified during the issue of the debentures.

This process marks the settlement of the company's financial obligation and can take place at the maturity date or earlier, depending on the redemption plan adopted by the company. The redemption is often carried out by using profits, reserves, or funds specifically set aside for this purpose.

Importance of Redemption of Debentures

1. Discharge of Liability: It clears the financial obligation towards debenture holders.
2. Improves Creditworthiness: Timely redemption improves the company's reputation and trustworthiness in the financial market.
3. Regulatory Compliance: Ensures the company adheres to legal requirements and terms of the debenture agreement.

Types of Redemption of Debentures

Redemption can happen under different conditions:

1. At Par: The company redeems the debentures at their nominal (face) value.
2. At Premium: The redemption occurs at an amount higher than the nominal value, as agreed during the issue.
3. At Discount: In rare cases, debentures may be redeemed at a value lower than the nominal value (though uncommon due to legal and financial constraints).

Methods of Redemption Explained Further

1. Redemption in Lump Sum (Single Payment at Maturity)

• Definition: The total amount of debentures is repaid to debenture holders in one single installment on the maturity date.
• Features:
  • Simple method requiring a one-time payment.
  • Requires significant fund management to ensure liquidity on the redemption date.

Journal Entries:

1. At the time of creating a Debenture Redemption Reserve (DRR):

                    Profit and Loss Account   Dr.

                                  To Debenture Redemption Reserve

2. When funds are invested in specified securities (if applicable):

                        Debenture Redemption Investment Account   Dr.

                                         To Bank Account

3. On encashment of investments

         Bank Account   Dr.

                                      To Debenture Redemption Investment a/c

4. On redemption of debentures:

                       Debentures Account   Dr.
                                           To Bank Account
5. On transferring DRR to General Reserve:
         Deb Red Res Acc Dr.
                          To General Reserve Account
2. Redemption in Installments 
(Drawings or Lottery System)
>Definition: Debentures are repaid in parts
 periodically, either on a yearly basis or as 
 specified in the terms of the issue. A lottery  
system is often used to select debentures  
for redemption.
Features:
Reduces the burden of a one-time lump 
             sum  payment.
Interest is paid on the outstanding principal 
only.
Journal Entries:
At the time of installment payment:
Debentures Account   Dr.
    To Bank Account
For payment of interest on outstanding
      debentures:
Interest on Debentures Account   Dr.
    To Bank Account
On creation and transfer of DRR 
Profit and Loss Account   Dr.
    To Debenture Redemption Reserve
3. Redemption Out of Sinking Fund 
 (Debenture Redemption Fund)
Definition: A fixed amount is set aside 
 from profits annually into a sinking fund.  
these funds are invested in securities, which
are liquidated at the time of redemption  
to ensure the availability of funds.
Steps and Journal Entries:
Creation of Sinking Fund:
Profit and Loss Account   Dr.
    To Sinking Fund Account
Investment of sinking fund amount:
Sinking Fund Investment Account   Dr.
    To Bank Account
Accrued interest on investments:
Bank Account   Dr.
    To Interest on Sinking Fund Invt.
At the time of liquidation of investments:
Bank Account   Dr.
    To Sinking Fund Investment Account
On redemption of debentures:
Debentures Account   Dr.
    To Bank Account
Transfer of balance in sinking fund to 
      General Reserve:
Sinking Fund Account   Dr.
    To General Reserve Account
4. Redemption by Purchase in the Open 
    Market
Definition: The company buys back its 
own debentures from the open market, often 
at a price lower than their  face value.
Features:
Helps the company save on redemption
       costs.
Debentures purchased can be canceled 
        immediately or held for future use.
Journal Entries:
For purchase of debentures:
If purchased at par:
    Debentures Account   Dr.
           To Bank Account
If purchased at a discount:
Debentures Account   Dr.
      To Bank Account
          To Profit on Red of Deb
If purchased at a premium:
Debentures Account   Dr.
Loss on Red of Deb Acc   Dr.
       To Bank Account
On cancellation of purchased deb:
Deb Redemption Reserve Acc   Dr.
       To Debentures Account
5. Redemption through Conversion
Definition: Debentures are redeemed by 
offering debenture holders the option to
 convert their holdings into equity shares or  
other securities. This eliminates the need
 for a cash outflow.
Features:
Reduces immediate cash burden.
Increases the equity base of the company.
Journal Entries:
At the time of conversion:
Debentures Account   Dr.
       To Equity Share Capital Account
      To Securities Premium Account 
                                         (if applicable)
Preparation of Final Accounts of a Company
Final Accounts of a Company
Final accounts are prepared to determine the  
financial position and profitability of a 
company at the end of an accounting period.
 They Consist of :
Trading and Profit & Loss Account: To 
ascertain gross profit, net profit, or net loss.
Balance Sheet: To show the financial 
 position, listing assets, liabilities, and equity.
Without Adjustments
When final accounts are prepared without 
 considering any adjustments, they reflect 
 the raw unmodified data from the trial 
balance. However, this does not provide
an accurate picture because adjustment 
like outstanding expenses, prepaid expense, 
or accrued income are not taken into
account.
With Adjustments
In practical scenarios, adjustments are vital
for accurate financial statements. These  
adjustments include items not directly 
available in trial balance but necessary
for a true and fair view of accounts.
Common Adjustments in Final Accounts
1. Outstanding Expenses: Expenses incurred
  but not yet paid.
Added to the respective expense and
        shown as a liability.
2. Prepaid Expenses: Expenses paid in advance.
Deducted from the respective expense
  and shown as an asset.
3. Accrued Income: Income earned but not 
yet received.
Added to the respective income
 and shown as an asset.
4. Income Received in Advance: Income 
received but not yet earned.
Deducted from the respective income 
 and shown as a liability.
5. Dep.: Reduction in the value of fixed assets.
Added as an expense in the P/L Account.
6. Provision for Doubtful Debts: Estimated 
loss from bad debts.
Deducted from the debtors and shown 
      as an expense.
7. Closing Stock: Unsold goods at the end of 
 the accounting period.
Shown as an asset and recorded in the 
        Trading Account.
Steps for Preparing Final Accounts with 
Adjustments
Prepare the Trading Account:
Include adjustments like closing stock.
Prepare the Profit & Loss Account:
Include adjustments for outstanding/
      prepaid expenses, accrued incomes, and
     depreciation
  3.Prepare the Balance Sheet:
Show adjusted figures for assets and .
      liabilities.
Format Overview
Trading Account:
Debit Side: Opening stock, purchases, 
      direct expense
Credit Side: Sales, closing stock.
Profit & Loss Account:
Debit Side: Office expenses, administra
 -tive expenses ,selling expenses, dep.
Credit Side: Gross profit, other incomes.
Balance Sheet:
Assets: Fixed assets (after depreciation),
current assets, and investments.
Liabilities: Share capital, reserves, 
long-term loans,   current liabilities.
current assets, and investments.