WHAT IS COMPANY ACCOUNTS BASIC CONCEPT

Accounting for Companies Issue of Shares (ACCOUNTING FOR SHARE)

WHAT IS COMPANY ACCOUNTS BASIC CONCEPT (ACCOUNTING FOR SHARE)

What is company account ?

A company accounts are a report of an organization’s the financial activity over a period (12 months). For determining the financial performance of a company accounts.They are managed and they are prepared in corporate accounting.

It is a recording of shares, debentures, etc. of the company. Other routine accounts of the company are also reported. With all these details, every year the company prepares accounts comprising the Cash Flow Statement, the Profit and Loss Statement, and Balance Sheet.

If a business is started as a business under such conditions company accounts need to be maintained.

What is a company?

Definition :

“A company is an artificial person created by law having separate legal entity with a perpetual succession and common seal.” 

A separate legal entity means it has a separate legal identity that follows certain laws prescribed by the government of India.

Artificial person means non leaving body.

perpetual succession means members can come and can go.

the common seal means decision and sign by its members on the company seal.

it means some person wants to start a business if they don’t want to star as a partnership the second option is to start a business like a company. which can be xyz company.

if A,B,C start a business and invested Rs 100,000 ,Rs 120,000, Rs 200000

hence there liability to the company is the money they invested in the business.

Therefore liability of A, B,C has liability is whatever money they invested in a business which is known as share capital.

Now A,B, C are known as Share holders or members..

Features of Company

Incorporation :

Registration of Company

for example in India Company act 1956 should be followed to legally form a company. We also have the company act 2013 also.

Separate Legal Entity

It is known by its name. It means it the company damages something the company is responsible not its shareholders.

 

Perpetual Existence.

It means has nothing to do with the entry or exit of its members or shareholder in the company.it keeps on going and working.

Limited Liability

it means the liabilities of the members are limited to the share capital (money they invested in the company). It means A, B, C’s liability to the company is only to the extend of money they invested in the business.

Whereas in Partnership and Sole partnership the liability of the person is not limited.

Transferability of shares

Shares are documented which contains the company name, seal, and name of the shareholders. They are made to raise share capital and if a person purchased them they have proof of holding shares.

Transferability of shares

if its a public company shares can be transferred but in the case of a private company shares cannot be transferred.

Common seal

The company has a seal where can, Shareholders, Directors, managers can sign and take decisions.

Difference between partnership and company

  • It is not mandatory to register under the partnership act whereas in the case of company registration of the company is mandatory.
  • The liability is of partnership is unlimited whereas the liability of the partner is limited.

Types of company

  • The company is of two types Private limited company and public limited company.
  • The members of a private limited company can be from 2 to 200 only and the share capital required in a private limited company is a minimum of Rs. 100000 whereas the members of a public limited company can trade their share publically. minimum members are 7.

Incorporation of company

  • A group of seven or more people can come together so as to form a public company whereas, only two are needed to form a private company. The following steps are involved in the incorporation of a company.
  • The first step in the incorporation of any company is to choose an appropriate name. A company is identified through the name it registers. The name of the company is stated in the memorandum of association of the company. The company’s name must end with ‘Limited’ if it’s a public company and ‘Private Limited’ if its a private company.
  • Preparation of Memorandum of Association and Articles of Association.
  • Printing, Signing and Stamping, Vetting of Memorandum and Articles

  • Power of Attorney

  • Other Documents to be Filed with the Registrar of Companies.
  • Payment of Registration Fees.
  • Certificate of Incorporation

What is company share ?

The share capital is the most important requirement of a business. It is divided into a ‘number of indivisible units of a fixed amount. These units are known as ‘shares’. According to Section 2 (46) of the Companies Act, 1956, a share is a share in the share capital of a company, and includes stock except where a distinction stock and shares is expressed or implied.

Example :

Total capital of a company is? 10, 00,000 divided in to 100,000 shares of Rs. 10 each, each unit of Rs. 10 is called share

 

The person who is the owner of the shares is called ‘Shareholder’ and the return he gets on his investment is called ‘Dividend’.

ISSUE OF SHARES AND TYPES OF SHARE CAPITAL

ISSUE OF SHARES

A company needs money to start  a business.

IF A person wants to start a business it can start a business as sole proprietorship where he alone do the business and invest his own money but it if needs funds than it can convert it to partnership business where 2 or upto 50 people can do business But limit of the partnership is 50. Now If the person wants to have more funds than he can turn business of partnership  into Company now it can have unlimited number of members and company can rase funds from bank or any financial institution and most important a company can raise money from public also.

Now if the public invest a money in company now the people who are invested in money is a capital and is known as share capital and in lieu of which a public will get a part known as share capital.

If a company needs 50,0000 lakhs rupees hence, they are divided into small part such as 500000 means  5000000/500000 = 10 value of share is Rs. 10.  

This particular process is known as shares.

Now company can ask to pay money in installment of the share from public if they want or even in one go.

Share capital

Now company can ask to pay money in installment of the share from public if they want or even in one go.

Now if company want money in parts than this Rs 10 is further divided to raise the fund from public by breaking its amount such as 3+3+2+2

The money taken by company after certain period of time from public  by dividing Rs 10 share  are given in list below

 

Division of share

Rs 10

3

Application money

3

Allotment money

2

Calls (first call)

2

Calls  (second call)

Total 10

 

 

Here take an example Rajesh purchased 100 share of company share value Rs 10 each total value of share 10X100=10000 now company will take money  in the list given below

Money invested in company

Date

Division of share

Rs 10

100X3=3000

1 Jan

3

Application money

100X3=3000

3 march

3

Allotment money

100X2=2000

6 June

3

Calls (first call)

100X2=2000

10 July

2

Calls  (second call)

Total money paid 10,000

 

10

 

 

 

Therefore, we can understand that Share capital is money in form of share collected from public

Types of share capital

  • Authorized share capital
  • Issued capital
  • Subscribed capital : a) Subscribed capital and fully paid b) Subscribed and not fully paid

 

Authorized share capital 

 is given in memorandum of association of company it gives information about how much money company can raised through public through share capital.

 

Issued capital

It is the amount which company has issued to public for raising share capital.

 

Subscribed capital :

The share buy by pubic is called as subscribed capital

 

Subscribed and fully paid if the share is fully paid by public .Example  suppose company issue share Rs 10 and paid by public in parts if it fully paid then it is subscribed and fully paid.

Example given below

Division of share

Rs 10

status

3

Application money

paid

3

Allotment money

paid

2

Calls (first call)

paid

2

Calls  (second call)

paid

Total 10

If its fully paid then

Subscribed and Fully paid

 

 

 

Subscribed and not fully paid: if share is not fully paid by pubic such are known as subscribed an dnot fully paid.

example given below

 

Division of share

Rs 10

status

3

Application money

paid

3

Allotment money

paid

2

Calls (first call)

Not paid

2

Calls  (second call)

Not paid

Total 10

If its fully paid then

Subscribed and not Fully paid

 

How share can be issued

  • Share at par
  • Share at premium

Share at par :

Suppose a company has a share of Rs. 10 each and is issuing it at Rs 10 each to the public it is known as share at par.

Share at premium

But some company has goodwill in the market they charge more for the share and the extra amount which the company gets is known as share at a premium. Example A company has a share value of Rs 10 but it issues to the public at Rs 15 this 5 Rs is a premium which is a profit for the company.

JOURNAL ENTRY ISSUE OF SHARE CAPITAL IN CAPIAL ACCOUNTS

As we lean earlier if company takes money it takes in parts.

Example like Share value Rs  10 in 3 parts  3+5+2 is to be received from the public it will be divided as given below

Division of share

Rs 10

3

Application money

2

Allotment money

5

Calls (first call)

Total shares 10

 

Example of issue of share in parts to public

If a company issued 100000 shares in market with share value Rs 10 each.

First of all, money ask for application money.

Division of share

Rs 10

3 *100000 = 300000

Application money

2 *100000 = 200000

Allotment money

5 *100000 = 500000

Calls (first call)

Total shares 100000*10 = Rs. 10,00000

 

 

When application is received.

Journal entry of Application money

Bank A/c Dr.  Dr.

300000

   To application Share A/c

     300000

Being Application money received from the public

Note : It means company received Application for share in the beginning. We made this entry to show how money comes in business. We cannot make journal entry of due of application because we don’t know who to due.

As they invested the money by public, now they become owner of the company therefore it will be transfer to share capital accounts . As we know that capital is the money invested by its owners, therefore the money of the public in company is known by the name share capital.

Now this Application money is transfer to company share capital .

               

Application Share A/c Dr

200000

   To share capital a/c

     200000

Being Application money received form public

Automatically share capital accounts is adjusted in the journal entry by crediting in the first entry and debiting in the second entry.

Journal entry of Final call money

When first and final call is due .

Here we have a make entry of due in the beginning and then the other entry of received.

Share First and final call A/c Dr

500000

   To Share Capital A/c

     500000

Being first call due

When first and final call is received.

Bank A/c Dr.

500000

   To Share First and final call A/c Dr

     500000

Being first call received in bank

JOURNAL ENTRY OF SHARE ISSUE EXPENSES

Share issue expense is expense by nature therefore its journal entry will be :

Share issue expenses a/c Dr

XXXXX

    To Bank   A/c  Dr

          XXXXX

Being share issue expenses paid

JOURNAL ENTRY OF SHARE ARE ISSUED TO PROMOTERS

When share is issued to promoters .Promoters are those who form the company.

Incorporation A/c Dr

XXXXX

To share capital A/c

         XXXXX

Being received from promoters.

JOURNAL ENTRY OF COMMISSION TO UNDERWRITES.

If share is issued to underwriters for his commission .

Underwriters : are those people who gives assurance to company to sell his share to public in lieu of commission .

Under writers Commission A./c Dr

XXXXX

     To Underwriters.

          XXXXX

Being underwriters commission due

 When under writer commissions is paid .

    Underwriters. A/c Dr

XXXXX

           To shar capital a/c

      XXXXX

Being underwriters’ commissions received

ISSUE OF SHARES AT PREMIUM

The shares of many successful companies which offer
attractive rates of dividend on their existing capitals fetch a
higher price than their face value in the market. When shares
are issued at a price higher than the face value, they are said to
be issued at a premium. Thus, the excess of issue price over
the face value is the amount of premium. For example, if a
share of Rs.10 is issued at Rs.12, Rs. (12 – 10) = Rs.2 is the
premium. the premium on issue of shares must not be treated
as revenue profits. On the contrary, it must be regarded as
capital receipt.
The Companies Act requires that when a company issues
shares at a premium whether for cash or otherwise, a sum
equal to the aggregate amount of the premium collected on
shares must be credited to a separate account called
“Securities Premium Account”. There are no restrictions in the
Companies Act on the issue of shares at a premium, but there
are restrictions on its disposal.

The Securities Premium Account may be applied by the
company–
(a) towards the issue of unissued shares of the company to the
members of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or
discount allowed on, any issue of shares or
debentures of the company;
(d) in providing for the premium payable on the redemption of
preference shares or of any debentures of
the company; or
(e) for the purchase of its own shares or other securities.
It is to be noted here that utilization of the amount of Securities
Premium Account except in any of the modes
specified above, will attract the provisions relating to the
reduction of share capital of a company.
We must show the Securities Premium Account as “Securities
premium reserves” separately in the liabilities,
side of the balance sheet under the head “Reserves & Surplus”.

Journal Entry of Issue of Shares at a Premium

When Allotment money  become due 

Share Allotment A/c 

To security  premium A/c

To Share capital A/c

(With money due on allotment, including premium)

 

 

Example issue of Shares at a Premium

XYZ Company Limited issued 35,000 equity shares of Rs.10
each at a premium of Rs.2 payable as follows: On Application
Rs.3 On Allotment Rs.5 (including premium) Balance on First
and Final Call The issue was fully subscribed. All the money
was duly received. Record journal entries in the books of the
Company.

Books of XYZ Ltd.

Particular

Amount

Amount

Bank    A/c                     dr.

To Equity share capital A/c

(Money received on application

Of 35000 shares @ 3 per share)

105,000

 

105,000

Equity shares application A/c      dr.

 To equity share capital A/c

(Transfer of allotment money on

Allotment of share capital)

105,000

 

105,000

Equity share Allotment A/c          dr.

 To equity share capital A/c

 To security premium A/c

175,000

 

105,000

70,000

Bank A/c                                       dr.

  To equity share Allotment A/c

(Money received including premium)

175,000

 

175,000

Equity shares first and final call A/c

   To equity share capital A/c

(Amount due on first and final call of RS

4 per share on 35,000 shares)

1.40,000

 

 

140,000

Bank A/c                                        dr.

   To equity share first and final call A/c

(Money received on first and final call)

140,000

 

140,000

 

 

Issue of Shares at A Discount


When shares are issued at a price lower than the face value,
they are said to be issued at discount. Thus, the excess of the
face value over the issue price is the amount of discount. For
example, if a share of ` 10 is issued at Rs.9 then Rs.(10 – 9) =
Rs.1 is the discount. As per companies Act 2013, a company
shall not issue shares at a discount except as provided in
section 54 for issue of sweat equity shares. Any share issued
by a company at a discounted price shall be void. Where a
company contravenes the provisions of this section, the
company shall be punishable with fine which shall not be less
than one lakh rupees but which may extend to five lakh rupees
and every officer who is in default shall be punishable with
imprisonment for a term which may extend to six months or
with fine which shall not be less than one lakh rupees but which
may extend to five lakh rupees, or with both

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