SEGMENT -1
Introduction
to Company Accounts
1.
Need to separate to management from ownership gave
birth to a form of organisation today known as ‘Company’:
2. Word
‘company is derived from Latin word ‘com’ i.e. with or together and ‘pains’
i.e.
bread. (It referred to merchant men discussing matters
taking food together).
3.
Company begs its origin in law.
4.
Shareholders the owners of the company elect the board
of directors, the managers of the company.
5. The capital
of the company consists of transferable shares and members have limited
liability.
6.
According to justice Marshall of USA “A corporation is
an artificial being, invisible, intangible and existing only in the
contemplation of law.”
7. Salient feature of a company:
(a) Incorporate
Association;
(b) Separate
legal Entity;
(c) Perpetual
Existence;
(d) Common
seal;
(e) Limited
liability;
(f) Distinction
between ownership and management;
(g)Not a citizen;
(h) Transferability
of shares;
(i) Maintenance
of books;
(j) Periodic
Audit;
(k)Rights of access to information.
8.
Types of company;
(a)
Statutory
company: All those companies which operate under the special act passed by
the state legislature or parliament. Example: UTI, LIC, RBI, etc. They do not
use word limited as part of their names. Their accounts are audited by
comptroller and auditor general of India (C & AG).
(b)
Government
company: Account to section-2(45) of companies Act, 2013, a company in
which not less than 51% of the paid-up share capital is held by central or
state government or both.
(c)
Foreign
company: Foreign company means any company or body corporate incorporated
outside India which:
(i)
Has a place of business in India, whether by itself or
though agent, physically or though electronic mode and:
(ii)
Conducts any businesses through electronic mode are
also termed as. Foreign company and need to comply with specified
provision.
(d) Holding company and subsidiary company: When a company:-
(i) Controls the composition of
the board of directors
(ii) Exercise or controls more than one half of the total
shares capital either at its own or together with one or more of its subsidiary
companies, then it is known as holding company and the other company is the
subsidiary company.
Total shares capital for this purpose means the aggregate of
1.
Paid up equity share capital and
2.
Convertible preference share capital
(e)
Registered
company: All companies registered under the companies Act, 2013 or under
any previous company act.
(f)
Limited
liability company: A company in which liability of shareholder is
restricted to the amount unpaid on shares.
(g)
Unlimited
liability company: A company in which liability is not so restricted to the
amount unpaid on shares.
(h)
Public and
private company:
Particulars
|
Public co.
|
Private
|
|
(a) Minimum paid up capital
|
5 lacs
|
1 lac
|
|
(b) Minimum members
|
7
|
2(1 in case of
OPC)
|
|
(c) Minimum directors
|
3
|
2
|
|
(d) Maximum member
|
unlimited
|
200
|
|
(e) Listed company
|
yes
|
No
|
|
(f) Offer
the public to subscribe its securities
(g) Word
to be used
|
yes
|
No
|
|
At the end of name only
‘LIMITED’
|
‘PRIVATE
LIMITED’
|
||
(h)
Companies (Amendment) Bill, 2003 states that if a
company, private or public, fails to enhance its minimum paid up capital (i.e.
Rs 1 lacs or Rs.5 lacs, as the case may be) each director, manager or
shareholder will have unlimited liability
(i)
Listed Company:
the public company whose securities are listed on a recognized stock exchange
for trading.
(j)
One person
company: It refers to a company which has only one person as a member. It is considered as
private company. Only a natural person who is an Indian citizen and resident in
India is eligible to incorporate OPC. It has been granted many relaxations in
compliance and procedural aspects. It cannot be incorporated or converted into
a company under section 8 of the act.
(k)
Small company:-
It means a company other than a public company whose- (i) Paid – up capital does not exceeds Rs.50
lakhs or such higher amount as may be prescribed which shall not be more than
Rs.5 core. Or
(ii) turnover as per last profit and loss account does not
exceeds Rs.2 crore or such higher amount as may be prescribed, which shall not
be more than Rs.20 crore .
9. In case of
private companies, shares are not listed on any stock exchange.
10.
Books of accounts are required to be maintained by
accompany under section 138 of companies Act 2013.
11.
In the annual general meeting (AGM) of the company,
following are laid down: (a) A Balance sheet as at the end of the period; and
(b) A profit and loss account for that period.
12.
Balance sheet of a company is set out in part I of
schedule III and profit and loss Account in part II of schedule III of
companies Act 2013.
SEGEMENT – 2
Issue, Forfeiture and Reissue of Shares
1.
Total shares capital of a company is divided into a
number of small invisible units of a fixed amount called a share.
2.
Fixed value of a share, printed on the share
certificate, is called nominal value/par value/face value.
3.
The liability of holder of shares is limited to issue
price of shares’ acquired by him.
4.
As per SEBI guidelines a company is free to price its
issue, if it has a three year track record of consistent profitability.
5.
A new company is free to price its issue, if it has
been promoted by a company having a five year track record of consistent
profitability
6.
Authorised
Capital: A company estimate its maximum capital requirements. This amount
of capital mentioned in ‘capital clause ‘Memorandum of Association. It is shown
in balance sheet at face value.
7.
Issued share
capital: Whatever portion of the shares capital issued by the company, it
is called ‘issued capital’. It is shown in balance sheet at factory value.
8.
Portion of authorised capital which is not issued is
known as ‘Un-issued capital’. It is not shown in balance sheet.
9.
Subscribe share
capital: Part of issued share capital wh9ich is subscribed by public and
allotted by company. (Includes face value of shares issued for consideration
other than cash).
10. called-up shares capital: The portion
of issue price of shares which a company has demanded or called from
shareholder is known as ‘called-up capital’ and the balance
11. Paid-up shares Capital: Portion of the
called-up which is paid by share holders when shareholders. When shareholders
fail to pay a particular amount it is known as ‘calls-inarrear’.
12. Reserve capital: As per companies Act, 2013 a company may be
by passing a special resolution decide that certain portion of its subscribed
uncalled capital shall not be called up except in the event of winding up to
the company (i.e. it is that portion which company has decided to call only in
the event of liquidation of company)
13. Capital
reserve, which is created out of profits only, is a part of reserve and surplus
and are not available for declaration of dividend. (May be use to write-off
capital losses such as discount on issue of shares, may be used to issue honus
shares, subject to condition that reserve is realised in case.
14. Preference shares enjoy preference over
equity shares in the matter of:
(a) Payment of
dividend; and
(b) Repayment
of capital
15. Cumulative Preference shares; Dividend
on these shares accumulate unless it is paid in full. Arrears of dividend are
then shown in balance sheet as a contingent liability.
16. If
dividend on above shares remains in arrears for a period of not less than two
years, holders of such shares will be entitled to take part and vote in general
meeting on every matter.
17. Non-cumulative preference shares: In
case no dividend is declared in any year, the right to receive such dividend
for that year expires. (I.e. holder is not entitled to arrears of dividend in
future.
18. In
case of above shares, if dividend remains in arrear for not less than two years
or for an aggregate period of not less than three years in a period of six
years, the holders will get right to vote in shareholders meeting i.e. general
meeting.
19. Participating preference shares: They
have a right to participate in surplus profit over and above their rights to
fixed dividend
20. Non-participating preference shares: They
only have rights to fixed dividend and not to only additional rights in surplus
profits.
22.
Redeemable
preference shares: These preference shares are repaid after the fixed
period of time or even earlier. In India companies can now issue only this
category of preference shares.
23.
Convertible
preference shares: These shares have a right to get converted in equity
shares.
24.
Non-convertible
preference shares: These shares are
not convertible in equity shares.
25.
(Imp) unless otherwise stated, preference shares are:
(a) Cumulative;
(b) Non-participating;
and (c) Non-convertible.
26.
Equity shares are non-preferential shares and are known
as common shares.
27.
To issue shares, private company depend upon ‘private
placement of shares’.
28.
A public company issues prospectus inviting general
public to subscribe for its shares
29.
Application are deposited in a scheduled bank by interested
parties
30.
First instalment paid along with application is called
‘Application Money’.
31.
Application money must be at least 5% of face value of
shares as per companies Act, 2013.
32.
The minimum application money to be paid by an
application along with the application money shall not be less than 25% of
issue price, as per SEBI guidelines.
33.
As per SEBI guidelines, a company must receive a
minimum of 90% subscription is against the entire issue.
34.
A company cannot proceed to make allotment of shares,
till minimum subscription is received within 30 days from date of issue of
prospectus.
35.
If the company does not receive minimum subscription of
90% of issue, the entire subscription shall be refunded to9 the applicants
within 15 days from the date of closure of issue. In case of delayed refund,
interest for the delayed period shall be payable.
36.
In case of delay in refunding, the company becomes
liable to pay interest @15% p.a. on the amount of refund.
37.
Second instalment is known as ‘Allotment Money’
38.
Subsequent instalment, if any, to be called by company
are known as ‘calls’.
39.
Successful applicants become the shareholders of the
company.
40.
A period of at least one month must be there between
two calls.
41.
The Securities and Exchange Board of India (SEBI)
Guidelines, require that shares issued are made fully paid-up within twelve
months of the date of allotment if size of issued is upto Rs. 500 cores.
42.
Under-subscription means shares offered are for
subscription is more than the number of shares subscribed by public.
43.
When shares applied for by public are more than shares
offered over-subscription.
[Number of shares is allotted is restricted to nu8mber of
shares issued for subscription]
44.
Full subscription means shares issued and shares
applied for subscription are equal.
45.
Shares issued at a Discount [section 53].
Section 53 of the companies Act
2013 provides that the company shall not issue shares at a discount except in
case of issue of sweat equity shares. Any share issued by a company at a
discounted price shall be void.
Note:- Since, now shares cannot
be issued at a discount any problems relating to it is not relevant as per the
provisions of companies Act, 2013.
46.
Shares issued at premium – [Section-52]
Financially strong and well –
managed companies generally issue their shares at a premium. Premium is
generally called with the amount6 due on allotment sometimes with application
money and rarely with call money.
47.
According to section -52 of the companies Act, 2013,
securities premium account may be used by the company:
(a) In playing
up un-issued securities of the company to be issued to member of the company as
fully paid bonus securities.
(b) To write
off preliminary expenses of the company.
(c) To
write off the expenses of, or commission paid, or discount allowed on any the
company.
(e) To buy back its own shares or
other specified securities as per section 68.
48.
Securities premium accounts credited with the amount in
excess of face value and it is shown under reserves and surplus on the
liability side of the balance sheet.
49.
Over-subscription occurs in case of good issues and
depends on many factors like investor confidence, general economic condition,
pricing of issue, etc.
50.
A company does not consider multiple applications by
the same person.
51.
“Pro-rata Allotment” means allotment in proportion of
shares applied for.
52.
calls-in-arrear or unpaid amount represents amount
uncollected from shareholders and is shown by way of deduction from
called-up-capital.
53.
According to table – F interest @ 10%p.a. is to be
charged on unpaid calls for the period between due date of call and time of
actual payment.
54.
Directors have authority to waive this interest on
calls-in-arrear at their discretion in individual cases or even charge at a
higher rate.
55.
Shareholder may sometimes pay a part or whole amount
not yet called up; it is known as calls-in-advance.
56.
According to table – f, interest @12%p.a. is to be paid
on such advance call money.
57.
It does not become part shares capital. It shown under
heading “Calls in Advance” on the liabilities side.
58.
Calls received in advance are not entitled to any
dividend.
59.
For charging and providing such interest, ‘Sundry
members Account’ Is debited or credited respectively.
60.
‘Forfeit’ means taking away of property on breach of
condition. Failure to pay call money results in forfeiture of shares. It is the
action taken by company to cancel the shares.
61.
Forfeiture should be done ‘bonafide’ in the interest of
company.
62.
If member fails to pay calls on due date, BOD may serve
a notice requiring payment of call together with interest, If any. Notice shall
state further period of 14 days from the date of service of notice. If the
amount is not paid even then, such shares shall be liable to be forfeited by
passing board resolution. A person whose shares have been forfeited shall cease
to be a member but shall remain liable to pay to the company all monies payable
by him in respect of such shares.
63.
If the premium has already been received by the
company, it cannot be cancelled even if the shares are forfeited in future.
64.
Shares may be forfeited for non –payment of calls,
premium or the unpaid portion of face value of shares.
65.
(Imp.) Fully paid-up shares may be forfeited for
realization of debts of shareholders if the Articles so provide it.
66.
(Imp.) Reissue of forfeited shares is not allotment of
shares but only a ‘sale’.
67.
In practice, forfeited shares are disposed off by
auction. (shares can be re- issued at any price, so long as the total amount
receives for those shares is not less than the amount in arrear in those
shares.)
68.
(Imp) points for consideration:
(a) Loss on
re-issued should not exceed the forfeited amount.
(b) If the loss
on re-issue is less than the amount forfeited, the surplus shall be transferred
to capital reserve.
(c) The
forfeited amount on shares not yet reissued should be shown in the balance
sheet as an additional to the share capital.
(d) When only a
portion of the forfeited shares are re-issued, then the profit made on reissue
of such shares must be transferred to capital reserve.
(e) When the
shares are re-issued at a loss, such loss is to be debited to “Forfeited shares
account”.
(f) If
the shares are re-issued at a price which is more than the face value of the
shares, the excess amount will be credited to securities premium account.
(g) If the
re-issued amount and forfeited amount (taken together) exceeds the face value
of the shares are re-issued, it is not necessary to transfer such amount to
securities premium account.
(h) Even though
original shares cannot be issued at a discount, but forfeited shares can be
issued at a discount.
(i) If
forfeited shares are re-issued at a discount the amount of discount can in no
case, exceed the amount credited to the shares forfeiture amount.
69.
Shares may be issued for consideration other than cash
for following reasons by publics Ltd. Cos.
(a) Against
purchase of land, building or other asset.
(b) In lieu of
services of promoters, lawyers, information of co.
Goodwill A/c Dr.
To
share capital A/c
Within one month of their
allotment co. must produce before registrar a written contract of sale or
service for which these shares have been allotted.
SEGEMENT – 3
Redemption of Preference Shares
1.
Redemption is the process of repaying an obligation, at
prearranged amounts and timings.
2.
In India, the issue of redemption of preference shares
is governed by section – 55 of the companies Act. 2013.
3.
The articles of Association of the company must provide
for the issue of redeemable preference shares
4.
Only fully paid preference shares can be redeemed.
5.
When the shares redeemed out of the divisible profits,
sum equal to the nominal value of the preference shares redeemed shall be
transferred out of the profits to the capital redemption reserve (CRR) Account.
6.
Following is the
list of divisible profits that can be used to the C.R.R. A/c.:
(a) General
reserve
(b) Profit and
loss account
(c) Dividend
equalization reserve
(d) Reserve
fund
(e) Debenture
redemption fund- to the extent it is not mandatory
(f) Insurance
fund
(g) Workmen’s
compensation funds
(h) Workmen’s
Accident fund
(i) Any
other free reserve
7.
Following are
not divisible profits, Hence C.R.R. should not be created out of them.
(a) Capital
Reserve
(b) Revaluation
Reserve
(c) Share
or security Premium Account
(d) Shares
forfeited Account
(e) Profit
prior to incorporation
(f) 
Investment
allowance Reserve before the expiry of the statutory (g)
Development Reserve period
(i.e. they can be used for the creation of
Investment
allowance Reserve before the expiry of the statutory (g)
Development Reserve period
(i.e. they can be used for the creation of
(h) Export profit Reserve C.R.R.
after the expiry of the statutory period)
8.
Logic behind the
creation of C.R.R.:
(a) Intact
capital maintenance
(b) Safeguard
of the company’s creditors, since the directors of the company may distribute
divisible profits by way of dividend.
9.
C.R.R. cannot be using any for any purpose except for
issuing fully paid bonus share to company’s members.
10.
No fixed assets should be sold for arranging cash
required for redemption.
11.
As per the companies Act, 2013, a company cannot issue
any preference shares which is irredeemable or is redeemable after the expiry
of a period of 20 years from the date of its issue.
12.
Why is capital
replacement required?
(a) To maintain
liquidity in the company.
(b) To protect
the interests of creditors.
13.
The nominal
value of preference shares redeemed can be replaced through any of the
following:
(a) The
proceeds of a fresh issue of shares;
(b) The capitalization
of undistributed profits (i.e. creating C.R.R.)
General
reserve A/c Dr.
Profit
and loss A/c Dr.
To
capital Redemption Reserve a/c
(c) A
combination of (a) and (b).
14.
The proceed from issue of debentures cannot be utilised
for the purpose of redemption of preference shares.
15.
As per section – 52 of the companies Act, 2013
securities premium A/c can be used for the purpose of providing premium on
redemption of preference shares but it cannot be used for financing the redemption.
Securities
premium on A/c Dr.
To
premium on redemption of preference shares A/C
16.
If the fresh issue is made at a premium, the amount of
Share premium should be excluded while computing at the amount of fresh issue.
(I.e. only nominal value is taken for replacement)
17.
If shares are issued against payment in instalments,
proceeds of the fresh issue will be taken up
to the allotment of shares.
18.
Company’s may sell their investment in the market to
arrange funds for redemption of preference shares. (This does not amount to replacement of
capital)
SEGEMENT – 4
Issue
of Debentures
1.
Debenture is most commonly used instrument of debt
financing. It helps in reducing the cost of capital of Co.
2.
A debenture is a bond issued by a company under its
seal acknowledging a debt and containg provision as regards repayment principal
and interest.
3.
FEATURE OR DEBENTURE:
(a) A document
which evidences a loan made to a company.
(b) A fixed
interest bearing security where interest falls due on specific dates.
(c) Interest
is payable at a pre-determined fixed rate, regardless of the level of profit.
(d) The original sum is repaid at a specified future date or is converted
shares or other debenture.
(e)
It may or may not create a charge on the assets of a
company as security. (If created, the nature of the charge and the assets
charged should be described. This charge should be registered with the
registrar.)
(f)
It can generally be bought or sold through the stock
exchange at a price above or below its face value.
4.
Distinction between debentures and shares:
s.no
|
Basis of Difference
|
Debenture
|
Shares
|
1
|
Status of debenture –
holder/shareholder
|
creditors
|
Owners
|
2
|
Voting
Rights & control
|
no
|
yes
|
3
|
Rate of returns
|
Interest payable at fixed
rate whether or not there is profit earned in 5the year.
|
Dividend payable at
uncertain rates (Fixed for preference shares) and only if profits.
|
4
|
Priority of payment on
liquidation
|
Debenture holders get
priority ahead of shares holders.
|
Share holders are paid
last after all the payments.
|
5
|
Treatment
in P & L A/C
|
Interest is debited in P & L
A/C as an expense (Charge
against profit) and hence tax deductible item.
|
Dividend is not an expense is actually an appropriation
of profit and hence not a
tax deductible item
|
6
|
Disclosure in B/s
|
Under “Non-current
Liabilities”
|
Under “Shareholder’s
funds”
|
7
|
Types
|
Secured/unsecured;
Redeemable/Irredeemable;
Registered/Non-convertible
|
Equity shares preference
shares
|
8
|
Convertibility
|
Debenture can be
converted into shares as per the terms of issue of debenture
|
Equity shares preference
shares
|
9
|
Redemption
|
Redeemable debenture can be redeemed before
liquidation as per the
terms of liquidation.
|
Equity shares cannot be
redeemed before liquidation
|
10
|
Forfeiture
|
Not possible
|
possible
|
11
|
Underwriting commission
limit
|
2.5%
|
5%
|
12
|
Issue at discount
|
Possible at any rate
|
Not possible
|
5.
TYPES OF DEBENTURES:
(i) On the
basis of security:
(a) Secured Debenture:
These are secured by a charge (viz. Fixed or floating) upon
some or all assets of the company.
(b) Unsecured
or “Naked” Debenture:
These are not secured by any charge upon any assets. These
are very risky from the viewpoint of investors.
(ii) On the basis of convertibility:
(a) Convertible debentures:-
The holders of these debentures have a right to convert
their debentures into equity shares (either at par or premium or discount after
a certain period of time from the date of its issue. (may be fully or partly
convertible).
(b) Non-convertible debentures:
(iii) On the basis of preference:
(a) Redeemable debenture:
These debentures are repayable as
per the terms of issue.
(b) Irredeemable debenture:
These debentures are not
repayable during the life time of the company (I.e. repaid only at the
liquidation of the company). Also called perpetual debentures.
(iv) On the basis of Negotiability:
(a) Registered
debentures:
These debentures are payable to a
registered holder whose name, address and particulars of holding are recorded
in the register of debenture – holders. (Provision of companies Act, 2013 are
to be complied with for effecting transfer of these debentures).
(b) Bearer debentures:
These debentures are transferable
by delivery. No record is kept by the company of the holders of bearer
debentures.
(v) On
the basis of priority:
(a) First
mortgage debentures:
These debentures are payable
first out of the property charged.
(b) Second
mortgage debenture:
These debentures are payable
after satisfying the first mortgage debentures.
6.
Debenture rarely issued at a premium. A satisfying the
first mortgage debentures
Premium when the market rate of
interest is lower than debenture interest rate.
7.
Debenture premium/ Securities premium: Premium received
on issue of debentures Is credited to securities premium account and is
subjected to restrictions imposed by section 52 of companies Act 2013. This is
so because debentures are covered under the definitio9n of securities
8.
The company issue debenture at a discount when the
market rate of interest is higher than the debentures interest rate.
9.
‘Discount on issue of debentures, is shown on the
Assets side of the Balance sheet under ‘Non current Assets’. In the subsequent
years, discount on issue of debentures is written off proportionately by
charging to the profits & Loss A/c if it is treated as deferred revenue
expenditure.
10.
Discount on issue of debenture is considered as an
incremental expense. The true expense (Net borrowing cost) for a particular
accounting period is the total interest payment plus the discount written off.
11.
‘Collateral security’ means a secondary or additional
security for loan which can be forfeited by the lender (banker) if the loan is
not repaid on the due date. (Company may issue its own debenture as collateral
security).
12.
No interest is payable on the debenture issued on
collateral security.
13.
If the loan and interest is not paid on due date, the
lender (banker) becomes the debentures holder.
14.
Interest will be payable on such debentures when there
is a default in payment of principal or interest on loan amount.
15.
Debenture can be issued for consideration other than
cash such as purchase of land, machinery etc.
FORMULA
(a) Purchase of assets:
(i)
Goodwill = Purchase consideration (p.c) – value of Net
Assets purchase: OR
(ii) Capital
Reserve = value of net assets purchase – purchase consideration (p.c) (b) Issue
price of debenture = purchase consideration (p.c) i.e. purchase price of Assets
(c) Settlement
of p.c. by issue of debenture:
Number of debenture required to
be issued = p.c / issue price per debenture
(d) Amount to
be credited in debenture Account=
Number of debentures required to
be issued face value per debenture
16.
Writing off of
loss/discount on issue of debentures:
Alt-1:
|
Debentures redeemable on a single date:-
|
Annually equal amount of discount will be written off
(Straight line method).
|
|
Alt-2:
|
Debentures redeemable in instalment at the end of every
year
|
(Redemption dates are same as year ending dates:-
|
|
Discount is
written off annually in the proportion of loan amount outstanding
|
|
In the beginning of the year.
|
17.
The company will pay interest net of tax to the
debenture holders because the company is under an obligation to deduct tax at
source at the rates applicabl3e. The companies will deposit the tax so deducted
with income tax Authorities.
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