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
Characteristics of a Company:
- Separate Legal Entity: Company ≠ Shareholders (like Business Entity Concept, but legally recognized).
- Limited Liability: Shareholders' liability is limited to unpaid share capital.
- Perpetual Succession: Death of shareholders doesn't affect the company.
- Transferability of Shares: Shares can be freely bought/sold (in public companies).
- Common Seal: Company's signature (now optional under Companies Act, 2013).
- Separate Property: Company owns assets in its own name.
Types of Companies
| Basis | Private Company | Public Company |
|---|---|---|
| Minimum Members | 2 | 7 |
| Maximum Members | 200 | Unlimited |
| Share Transfer | Restricted (need board approval). | Freely transferable. |
| Public Issue | Cannot raise funds from public. | Can issue shares/debentures to public. |
| Name Ending | Pvt. Ltd. or Private Limited | Ltd. or Limited |
| Examples | Most startups, family businesses. | Listed companies (TCS, Reliance). |
Share Capital
"The money shareholders invest in exchange for ownership."
Types of Share Capital
- Authorized (Nominal) Capital: Maximum capital a company can issue (mentioned in MOA).
- Issued Capital: Portion of authorized capital offered to the public.
- Subscribed Capital: Part of issued capital actually bought by shareholders.
- Called-Up Capital: Amount company has asked shareholders to pay.
- 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.
| Basis | Shares | Debentures |
|---|---|---|
| Nature | Ownership (equity). | Loan (debt). |
| Return | Dividend (variable, not guaranteed). | Interest (fixed, mandatory). |
| Voting Rights | Yes (equity shares). | No. |
| Repayment | Only on liquidation (or buyback). | On maturity (redemption). |
| Risk | High (residual claimants). | Low (creditors). |
| Tax Treatment | Dividend not tax-deductible. | Interest is tax-deductible expense. |
Issue of Shares
Companies can issue shares in different ways:
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)
Legal Requirements:
- Shares must be fully paid.
- Redemption must be out of profits (transfer to Capital Redemption Reserve) or from fresh issue of shares.
- Premium on redemption (if any) must be paid out of Securities Premium or profits.
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:
- Lump Sum Payment: Pay all debenture holders at once.
- By Purchase in Open Market: Buy back debentures from the market.
- 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
Test Your Knowledge
Question 1 of 4
1. Minimum number of members required to form a Public Company: