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Company Accounts

"When business grows beyond partnerships—welcome to the corporate world."

A Company is a separate legal entity created under the Companies Act, 2013. It can own property, sue and be sued, and exists independently of its owners (shareholders).

What is a Company?

Definition: An artificial legal person with perpetual succession and a common seal.

Key Features

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Types of Companies

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Share Capital

"The money shareholders invest in exchange for ownership."

Types of Share Capital

  1. Authorized (Nominal) Capital: Maximum capital a company can issue (mentioned in MOA).
  2. Issued Capital: Portion of authorized capital offered to the public.
  3. Subscribed Capital: Part of issued capital actually bought by shareholders.
  4. Called-Up Capital: Amount company has asked shareholders to pay.
  5. Paid-Up Capital: Amount actually received from shareholders.

Example:

Authorized Capital: ₹10 Crores
Issued Capital: ₹8 Crores
Subscribed: ₹7 Crores (₹1 Cr not subscribed, returned)
Called-Up: ₹5 Crores (₹2 Cr not yet called)
Paid-Up: ₹4.8 Crores (₹20 Lakhs unpaid by some shareholders)

Types of Shares

1. Equity Shares (Common Stock)

  • Voting Rights: Yes
  • Dividend: Variable (depends on profit)
  • Risk: High
  • Claims: Last in line during liquidation

2. Preference Shares (Preferred Stock)

  • Voting Rights: Usually No
  • Dividend: Fixed % (e.g., 8% preference shares)
  • Priority: Dividend paid before equity, repayment before equity in liquidation
  • Types: Cumulative, Non-Cumulative, Redeemable, Irredeemable, Participating, Non-Participating

Debentures

"Borrowing money from the public."

A debenture is a debt instrument—the company borrows money and promises to repay with interest.

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Issue of Shares

Companies can issue shares in different ways:

1. At Par
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2. At Premium
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3. At Discount

Accounting Entry for Share Issue

At Par:

Bank A/c                           Dr.  ₹10,00,000
    To Share Capital A/c                    ₹10,00,000
(1,00,000 shares of ₹10 each issued at par)

At Premium:

Bank A/c                           Dr.  ₹15,00,000
    To Share Capital A/c                    ₹10,00,000
    To Securities Premium A/c               ₹5,00,000
(1,00,000 shares of ₹10 each issued at ₹15)

Forfeiture of Shares

"Taking back shares when shareholders don't pay."

If a shareholder fails to pay the call money (installment), the company can forfeit (cancel) their shares.

Accounting Entry:

Share Capital A/c                  Dr.  ₹10,000
    To Share Forfeiture A/c                 ₹7,000
    To Calls-in-Arrear A/c                  ₹3,000
(100 shares of ₹10 each, ₹7 paid, ₹3 unpaid)

Re-Issue of Forfeited Shares

The company can reissue forfeited shares at any price (at par, premium, or discount).

Entry:

Bank A/c                           Dr.  ₹8,000
Share Forfeiture A/c              Dr.  ₹2,000
    To Share Capital A/c                    ₹10,000
(Reissued 100 shares at ₹8 each)

Redemption of Preference Shares

"Paying back preference shareholders."

Preference shares can be redeemable (company promises to buy them back after some years).

Conditions for Redemption (Section 55, Companies Act, 2013)

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Bonus Issue

"Free shares to existing shareholders!"

A Bonus Issue is the issue of free shares to existing shareholders out of reserves.

Why do companies issue bonus shares?

  • Convert accumulated reserves into capital.
  • Reward shareholders without paying cash.
  • Improve liquidity (more shares in market).

Accounting Entry:

General Reserve A/c                Dr.  ₹50,00,000
    To Bonus to Shareholders A/c            ₹50,00,000

Bonus to Shareholders A/c          Dr.  ₹50,00,000
    To Share Capital A/c                    ₹50,00,000
(Issue of 5,00,000 shares of ₹10 each as bonus)

Rights Issue

"Giving existing shareholders the right to buy new shares first."

Before issuing shares to the public, a company must offer them to existing shareholders proportionate to their current holding.

Accounting: Same as normal share issue (at par/premium).

Redemption of Debentures

Debentures are repaid on maturity. Methods:

  1. Lump Sum Payment: Pay all debenture holders at once.
  2. By Purchase in Open Market: Buy back debentures from the market.
  3. By Conversion: Convert into shares (equity/preference).

Entry (Lump Sum):

Debentures A/c                     Dr.  ₹10,00,000
    To Bank A/c                             ₹10,00,000
(Redemption of ₹10 Lakh debentures at par)

Real-World Example

XYZ Ltd. Issues Shares:

  • Authorized Capital: ₹1 Crore (10 Lakh shares of ₹10 each)
  • Issued: 5 Lakh shares at ₹12 (premium of ₹2)
  • Applications received: 6 Lakh shares
  • Allotment: 5 Lakh (1 Lakh applications rejected)

Accounting:

Bank A/c (6L × ₹12)                Dr.  ₹72,00,000
    To Share Application A/c                ₹72,00,000

Share Application A/c              Dr.  ₹72,00,000
    To Share Capital A/c (5L × ₹10)         ₹50,00,000
    To Securities Premium (5L × ₹2)         ₹10,00,000
    To Bank A/c (1L × ₹12, rejected)        ₹12,00,000

Quiz: Company Accounts

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