Meaning and Definition of Company

A company is a voluntary association of many persons. It is an artificial person

recognized by law with a distinctive name, a common seal, a common capital and having
perpetual succession.

Indian Companies Act 1956 defines a company as Company formed and registered
under this Act or an existing company

Characteristics of a company
Refer above

Types of companies: - can be classified --

A. On the basis of incorporation

1. Chartered company:-incorporated under a special charter by the Head of the State

2. Statutory company:-created by special Act in Parliament. Eg: SBI, RBI, LIC

3. Registered company: - formed and registered in India with the Registrar of Companies
under the provisions of the Companies Act

B. On the basis of liability of members

1. Company limited by shares: - here the members liability is limited to the extent of value
of shares held by them

2. Company limited by guarantee: - liability of member is limited to the amount of

guarantee stated in the memorandum

3. Unlimited company: - liability of member is unlimited

C. On the basis of public interest

1. Private company: A private company is one which by its Articles,

a) Limits the number of members to 50

b) Prohibits the invitation to the public to subscribe its shares or debentures &

c) Restricts the transferability of its shares.

2. Public company: - one which is not a private company

Minimum Subscription
It is the minimum amount of capital fixed by the directors to be raised from the
members by way of subscription. It must be stated in the Articles of Association and
Prospectus. No allotment of shares can be made unless the minimum subscription is
realized from the applicants of shares.

The amount of minimum subscription must cover the following:

1. The purchase price of any property purchased or to be purchased which is to be met out
of the proceeds of the issue.

2. Preliminary expenses payable by the company.

3. Commission on shares payable by the company.

4. Repayment of loans taken by the company in respect of the above mentioned matters.

5. Working capital

Share Capital
The capital of a company known as share capital and is divided in to different units
with definite value called shares. The main divisions of share capital are:

1. Nominal or Registered or Authorized Capital: - the capital with which accompany is

registered is called the authorized capital. It is the maximum amount of capital that a
company can issue.

2. Issued capital: - part of authorized capital which is offered to the public for subscription.
Remaining part is unissued capital

3. Subscribed capital: - part of issued capital for which applications are received from the
public. Remaining part is unsubscribed capital

4. Called up capital: -The amount on the shares which is actually demanded by the
company to be paid
5. Paid up capital: -part of called up capital which has actually been paid up by the
shareholders. The sum still to be paid is known as calls in arrears

6. Reserve capital: - that portion of the uncalled capital which is kept in reserve and which
will be called up only on winding up of the company. A limited company by passing a
special resolution may set apart a portion of the uncalled capital as reserve capital

Types of shares: can be classified in to Preference Shares and Equity Shares

Preference Shares: -those shares which carry preferential right in respect of payment of
dividend and repayment of capital in the event of winding up. The rate of dividend on
preference share is fixed. This dividend is payable before any dividend is paid on equity
shares. Preference share may of the following types:

1. Cumulative Preference Shares: In the case of this type of shares, the arrears of dividend,
if any, are carried forward and paid out of the profits of subsequent years

2. Non- Cumulative Preference Shares:

3. Participating Preference Shares: In addition to fixed rate of dividend, these shares have
the right to participate in the surplus profit left after paying a reasonable rate of dividend on
equity shares

4. Non-Participating Preference Shares: These shares get only fixed rate of dividend

5. Redeemable Preference Shares: - are repayable after the expiry of the fixed period or at
the option of the company.

6. Convertible Preference Shares: These shares are given right of conversion into equity
shares within a specified period or at a specified date according to the terms of issue.

Equity Shares (ordinary shares)

Equity shares are those which are not preference shares. They do not carry any
preferential right in respect of dividend or repayment of capital. Dividend is paid after the
payment on preference shares. The rate of dividend is not fixed. Equity shareholders get full
voting power.

Sweat Equity Shares

 These are equity shares issued by the company to employees or directors at a
discount or for consideration other than cash for providing know-how or making available
rights in the nature of intellectual property rights or value additions.

Stock

It is a consolidation of fully paid shares. Lord Hatherly defines Stock is a set of

shares put together in a bundle It has no definite value

Differences between Stock and Shares

Share
1. It has a face value
2. It may be fully paid or partly
paid
3. It can issued directly
4. It has a distinctive number
5. In cannot be issued or
transferred in fractions
6. It can be issued by any
company
Stock
1. It has no face value. It can be of any
denomination
2. It is fully paid
3. It cannot be issued directly
4. It has no such number
5. It can be transferred in fractions subject to a
minimum value
6.Only limited companies can convert shares
into stock
7. It may be registered or unregistered
7. It is always registered

Issue of Shares
The shares of a company issued in three ways:

a) By private placement of shares: -issue of securities of a company direct to one investor

or a small group of investors. Investors are financial institutions, other companies, friends or
relatives. In this case no prospectus is issued.

b) By right issue of shares It is an issue of shares to the existing shareholders in

proportion to their existing shareholding. In a right issue no prospectus is issued.

c) By public issue of shares:- means selling of shares or securities to public by issue of

prospectus. Public issue is of two types- i) initial public offer and ii) offer for sale

Shares Payable by Installments: Usually the company receives the price of securities in
installments. A part of the price is received along with application-termed as application
money. Another part is received at the time of allotment of shares-termed as allotment
money. The balance is generally demanded from the shareholders either in full or in
installment. Each installment is called a call. Calls may be termed as first call, second call
etc and the last call is termed as final call

Accounting treatment: A company can issue shares in the following two ways:

1. For cash 2. For consideration other than cash

Journal Entries for Issue of Shares for Cash

1. On receipt of application money 2. On acceptance of application

Bank Share application
A/c Dr A/c Dr
To Share application To Share capital

3. On making allotment due 4. On receipt of allotment money

Share allotment A/c Bank
Dr A/c Dr
To Share capital To Share allotment

5. On making first call 6. On receipt of first call money

Share first call Bank A/c

A/c Dr Dr
To Share capital To Share first call
(Similar entries may be made for the second
and third call)

Shares can be issued in any of the following three ways:

1. At par 2). At premium 3). At discount

Issue of Shares at Par: When shares are issued at a price equal to their nominal value, it
is called issue of shares at par

Issue of Shares at a Premium: When shares are issued at a price higher than their face
value, it is called issue of shares at a premium. The premium amount is a capital receipt. It
should be credited to Security Premium Account and shown on the liability side of Balance
Sheet.

According to Companies Act, the security premium may be applied only for the
following purposes:

i) To issue fully paid bonus shares to the shareholders

ii) To write off preliminary expenses of the company

iii) To write off the expenses of the commission paid or discount allowed on issue of shares
or debentures of the company
iv)To provide premium payable on the redemption of any redeemable preference shares or
debentures of the company.

Journal entries (Accounting Treatment)

a) When premium is payable with application money b) When premium is payable with allotment
1. Bank A/c Dr (with the money
total) 1.Share Allotment A/c Dr (with the total)
To Share application To Share capital (with allotment
money)

2. Share application A/c Dr (with the To Security Premium A/c (with

total) premium)

To Share capital (with application 2.Bank A/c Dr (with the

money) total)

To Security Premium A/c (with premium) To Share allotment

Note: If nothing is specified premium is deemed to have been received with allotment money

Issue of Shares at a discount

When shares are issued at a price lower than their face value, it is called issue of
shares at discount. Discount on issue of shares is a capital loss. Hence it should be debited
to Discount on Issue of Shares Account and shown on the Assets side of the Balance
Sheet. A company can issue shares at a discount subject to the following conditions:

1. The rate of discount should not exceed 10% of the nominal value of shares.

2. The share must belong to a class already issued.

3. The issue must be authorized by an ordinary resolution in general meeting.

4. The issue must be sanctioned by the Company Law Board

5. One year must have elapsed since the date at which the company was allowed to
commence business.

6. The issue must be completed within two months from the date of the sanction of the
Company Law Board or within such extended time as the Company Law Board may allow
 Usually the discount on issue is recorded at the time allotment:

The entry is:

Share Allotment A/c Dr (with the allotment money due)

Discount on Issue of Shares A/c Dr (with discount on issue)

To Share Capital (with total)

Under Subscription of Shares: When the applications received for shares is less than the
number of shares issued, it is under subscription. In such a case, the allotment will be equal
to the number of shares subscribed and not to the shares
issued.

Over Subscription of Shares: When applications received for shares is more than the
number of shares issued, it is called over subscription. In such case the company allots
shares only up to the number of shares issued. Under such a situation company may reject
some applications altogether, allots in full on some applications and makes pro-rata
allotment on some applications.

Pro-rata means proportionately. Pro-rata allotment means that allotment on

every application is made in the ratio which the number of shares allotted bears to number
of shares applied

Accounting Treatment (Journal Entries)

1. When application money returned 2. When excess application money is adjusted towards
Share Application A/c Dr allotment or call

To Bank Share Application A/c Dr (with the total)

To Share Allotment (with the sum adjusted towards
allotment)
To Call (if any) (with the sum adjusted towards
call)

Calls in Arrears: refer to the amount called up by the company but not paid by the
shareholders. In short these are unpaid calls. Directors are authorized to charge interest on
calls in arrears at a rate specified in the Articles. If nothing is specified, they can charge at a
rate not exceeding 5% p.a

Calls in Advance: refer to the amount paid by the shareholders in advance of it becoming
due. The company must pay interest in calls in advance at a rate specified in the Articles. If
the Articles is silent, the company is liable to pay interest @ 6% p.a from the date of receipt
to the due date

Journal entries in respect of calls in advance

1. When the company receives calls in advance 2. When the call really becomes due
Bank A/c Dr Calls in advance A/c Dr
To calls in advance A/c To Call A/c

Forfeiture of Shares: simply means cancellation of shares due to non-payment of

allotment money or call money within a specified period. The shareholder whose shares
have been forfeited ceases to be member of the company. The company does not refund
the amount he has already paid to the company.

Journal Entries

Share Capital A/c Dr (with the amount called up)

Security Premium A/c Dr (with the unpaid amount of premium)

To Share Allotment (with the unpaid amount on allotment)

To Share Call (with the unpaid amount on call)

To Discount on Issue of Shares A/c (if shares are issued at discount)

To Forfeited Shares A/c (with the amount paid excluding premium)

Note: Security Premium A/c should be debited only when an entry has already been
passed for security premium when it becomes due

Re-issue of Forfeited Shares: If the Articles permit, the company can re-issue the forfeited
shares at par, at premium, or at discount. But the discount on re-issue should not exceed
the amount forfeited.
 Accounting Treatment (Journal Entries)

Bank A/c Dr (amount received on re-issue)

Discount on Issue of Shares A/c Dr (with the amount of original discount if the

Shares originally were issued at

discount)

Forfeited Shares A/c Dr (with the discount or loss on re-issue)

To Share Capital A/c (with the amount credited as paid up)

To Security Premium A/c (with the amount of premium on re-issue)

If all forfeited shares have been re-issued, the credit balance left in the Forfeited
Shares A/c being capital profit will be transferred to Capital Reserve A/c by passing the
following journal entry:

Forfeited Shares A/c Dr

To Capital Reserve A/c

If only a part of the forfeited shares have been re-issued, only the profit on shares
which have been re-issued is transferred to Capital Reserve A/c.

Forfeiture and Re-issue of Shares when there is Over-subscription and Pro-rata

Allotment: in this case following procedures may be adopted-

1. Calculate total number of shares applied for

2. Calculate the application money paid by the defaulter

3. Calculate actual application money due on allotted shares

4. Calculate excess application money to be adjusted towards allotment

5. Calculate the amount due on allotment or call

6. Calculate the unpaid amount

Surrender of Shares: When a shareholder finds that he cannot pay the call money on
shares held by him, he may voluntarily return his shares to the company. Such voluntary
return of shares to the company by the shareholder is called surrender of shares. The
accounting treatment will be the same as that of forfeiture. The shareholder does not get
back the amount already paid by him.

Issue of Shares for Consideration other than Cash (Journal entries)

a. When property is acquired b. When shares are issued in exchange for the value of
Property or Asset A/c Dr (with cost) property
Vendor A/c Dr
To Vendor
Discount on Issue A/c Dr (in case of
discount)
To Share Capital (face value)
To Security Premium A/c (in case of
premium)

Lien on Shares: It is the right of the company to retain the possession of shares for the
debts due by the member to the company.

Right Shares: According to Section 81 (1) of the Companies Act, when the company wants
to increase the subscribed capital by issue of further shares, such shares must be issued
first of all to existing shareholders in proportion to their existing shareholding. These share
are called Right Shares

Value of Right: is the excess of market price over average price in respect of right shares

Value of right =Market Price Average price

Or

Fresh right shares (fresh + existing) shares X (market price issue price)