CHAPTER 1

COMPANIES FINAL ACCOUNTS

Contents
• Meaning of Company
• Memorandum of Association
• Articles of Association
• Preparation of Final accounts As Per the Companies Act 2013.(Problems & Solutions)
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MEANING OF COMPANY
A company is called as Association of persons and these persons are going to contribute money or
money's worth to the common stocks and they will use it for common purpose.

Who creates a company?

Company is created by Law. This means that company is a legal person and it is an artificial person. The
Companies Act 2013 provides definition of company in Section 2(20) as:
"A company is a ‘company’ incorporated under this Act (Companies Act 2013), or under any previous law
(any Act prior to the Companies Act,2013)."
Previous Laws
• The Companies act 1956
• The Companies Act 1913
• The Companies Act 1882
• The Companies Act 1866
Features of the Company
1. Incorporated Association: It is basically registered body of individual and according to Companies
Act 2013 it becomes absolutely compulsory to register the joint stock company (Public or Private
Companies).

2. Artificial person: Different from its member, members can be an artificial or a natural but
company is an artificial person and this artificial person can enter into contracts meaning it has
the capacity to purchase or sell a property on its name. It can sue someone and can be sued.

3. Perpetual Succession: Unlike partnership and proprietorship (In case of Proprietorship, if

proprietor dies that business comes to an end. In case of Partnership if partners die then this
business gets dissolute and then it should be continued with other set of partners with a fresh
agreement.), in a company death or insolvency of any of the shareholder will not affect succession
of the company. It indicates that the company always remains permanent, that is, it never ceases
or comes to an end even if the members change or even if some or all members of the company
die. However, the company may come to an end when the name of the company is struck off the
register of the Registrar of Companies or is wound up as per the relevant provisions of the Act.

4. Common Seal: A Company is an artificial person created by law.

• It can't sign in its name and it does not have its own signature.
• It will have a common seal on which name is Engraved.
 • Common seal is considered as official signature of the company and this will be affixed on all
the important documents and contracts as per the resolution that is passed by Board of
Directors (BODs).
• However, it may be noted that common seal is now optional vide the Companies
(Amendment) Act, 2015 with effect from 29th May, 2015. Thus, the company may or may not
have common seal.

5. Limited Liability: In companies, liability is Limited to value of shares held by them. Partnership or
Proprietorship has got unlimited liabilities. Company whether it is Pvt. or Public, if it fails to
enhance its minimum paid up capital then each Managing Director has unlimited liability. Private
and Public Limited should have minimum capital stipulation 1 lakh and 5 Lakhs respectively, if that
condition is not complied, if that minimum capital is not maintained, then they have unlimited
liability otherwise liability is limited to shares held by shareholders.

6. Separation between Management and Ownership: Shareholders are not going to run the show
and they may be part of management in the form of MD or Director but it is not necessary that
only shareholders should run the show. They can engage a management, they can have their
representatives i.e. Board of Directors (BODs) and they run the show.

7. Transferability of shares: Shares of a company are freely transferable but subject to restrictions
that are placed on transfer of Private Limited companies. In case of Public Ltd. or Listed companied
shares are freely transferable but when it comes to Private Limited there are certain restrictions
in the transfer of shares.

8. Separate Legal status: Shareholders/owners are not liable for acts of the company and if there is
anything wrong then the company can be sued directly but not each and every shareholder.

9. Large membership

10. Minimum capital requirements: Depends on the nature of company Pvt. 1 lakhs and public ltd.
Min is 5 lakhs.

Types of Companies
There are different types of company, which can be classified on the basis of formation, liability,
ownership, domicile and control.
1. On The Basis Of Formation or Incorporation
a. Chartered Companies: Companies which are incorporated under special charter or proclamation
issued by the head of state, are known as chartered companies. The Bank Of England, The East
India Company, Chartered Bank etc. are the examples of chartered companies.
 b. Statutory Companies: Companies which are formed or incorporated by a special act of
parliament are known as statutory companies. The activities of such companies are governed by
their respective acts and are not required to have any Memorandum or Articles of Association.
c. Registered Companies: Registered companies are those companies which are formed by
registration under the Company Act. Registered companies may be divided into two categories.
➢ Private Company: A company is said to be a private company which by its Memorandum
of Association restricts the right of its members to transfer shares, limits the number of
its members and does not invite the public to subscribe its shares or debentures.
➢ Public Company: A company, which is not private, is known as public company. It needs
minimum seven persons for its registration and maximum to the limit of
its registered capital. There is no restriction on issue or transfer of its shares and this type
of company can invite the public to purchase its shares and debentures.
2. On the basis of Liability: Registered companies are divided into two types, namely, companies having
limited liability and companies having unlimited liability.

a. Companies having Limited Liability: This liability can be limited in two ways:
➢ Liability Limited by Shares: These are those companies in which the capital is divided into
shares and liability of members (shareholders) is limited to the extent of face value of
shares held by them. This is the most popular class of company.
➢ Liability Limited by Guarantee: These are such companies where shareholders promise
to pay a fixed amount to meet the liabilities of the company in the case of liquidation.
b. Companies Having Unlimited Liability: A company not having any limit on the liability of its
members as in the case of a partnership or sole trading concern is an unlimited company. If
such a company goes into liquidation, the members can be called upon to pay an unlimited
amount even from their private properties to meet the claim of the creditors of the company.

3. On the basis of Ownership

a. Government Companies: A government company is a company in which at least 51% of the
paid up capital has been subscribed by the government.

b. Non-government Companies: If the government does not subscribe a minimum 51% of the
paid up capital, the company will be a non-government company.

4. On the basis of Domicile

a. National Companies: A company, which is registered in a country by restricting its area of
operations within the national boundary of such country is known as a national company.

b. Foreign Companies: A foreign company is a company having business in a country, but not
registered in that country.

c. Multinational Companies: Multinational companies have their presence and business in two
or more countries. In other words, a company, which carries on business activities in more
than one country, is known as multinational company.

5. On the basis of Control

 a. Holding Companies: A holding company is a company, which holds all, or majority of the share
capital in one or more companies so as to have a controlling interest in such companies.

b. Subsidiary Company: A company, which operates its business under the control of another
company (i.e. holding company), is known as a subsidiary company.

MEMORANDUM AND ARTICLES OF ASSOCIATION

Terms which one need to know while registering the company officially. These are:

1. Memorandum of Association (MOA), and

2. Articles of Association (AOA)

Memorandum of Association
• Memorandum of Association (MOA) is the main, compulsory document required for the
incorporation of the company. It must be registered with the ROC (Registrar of Companies) at
the time of incorporation. It lays down the objects, scope, powers and area of operation of the
company, all of which the company can’t transgress. Thus, it lays down it’s the limits of the
company.
• It must be drafted very carefully as the company can’t go against it later. Moreover, it can only
be amended by a difficult procedure in the Annual General Meeting with the knowledge of the
Central Government. It can’t be amended retrospectively.

• It guides all relations within and outside the company by laying guidelines and rules for the same
and all the subordinate documents and agreements follow from it. Also known as the ‘charter of
the company’, it must lay down the following six conditions:

Name Clause It is meant to register the official name of the company with the CG (Central
Government) which must be original and must not, in any way, resemble that of
a pre-existing one.
Situation Clause It deals with highlighting the name of the state in which the company’s
registered office is located.
Object Clause The main and auxiliary objects of the company are specified here.
Liability Clause It specifies the liabilities of each member of the company.
Capital Clause It lays down the total capital of the company.
Subscription or It lays down in detail all information about subscribers and their shares.
Associate Clause

ARTICLES OF ASSOCIATION
• Articles of Association (AOA) is a secondary document that is constituted only after the MOA. It
lays down the rules and regulations for the administration and management of the company.
The articles lay down the right, responsibilities, powers, duties, etc of the members along with
information regarding the accounts and audit of the company.
 • It is mostly advisable for every company to have its own article but a company limited by shares
can adopt Table A for the same purpose. It is made to guide the working and governance inside
the company.
• It follows the MOA and can’t contradict it. It is easier to amend than MOA which can be done
without any restrictions. It can be amended retrospectively in the Annual General Meeting as
per the choice of the company.
Differences between MOA and AOA

MOA AOA
MOA is the supreme document without which the All other documents are subordinate to it and follow
company can’t function. from it, including AOA.
MOA lays down the conditions for the registration AOA is a document that contains the rules and
of the company regulations for the administration of the company.
MOA lays down the powers, objects and area of AOA lays down the rules for the management and
operation of the company. administration of the same.

MOA defines the relationship between the AOA defines relations within the company.
company and the outside world.
MOA is defined in Section 2 (56) of companies act AOA is found under Section 2(5) of the Companies
2013. Act,2013
IN CASE OF ANY CONFLICT BETWEEN THE TWO, MOA TAKES PRECEDENCE.
Acts beyond the MOA are void Acts beyond the AOA are simply irregular but not
void.
MOA has six compulsory clauses. AOA is framed arbitrarily as per the discretion of the
members of the company.
MOA is a compulsory document which must be AOA is not obligatory and in case of limited shares, a
registered with the ROC at the time of incorporation company can use its Table A in its place.
of the company.
MOA can only be amended prospectively and not AOA can be amended retrospectively in the Annual
retrospectively, that too in the Annual General General Meeting as per the whims of the members.
Meeting with the knowledge of the CG.

PREPARATION OF FINAL ACCOUNTS AS PER THE COMPANIES ACT 2013

(SCHEDULE III)
Final Accounts (Vertical Format): Final Accounts are the end results of the working of the organisation.
Here we prepare two statements:
1. Statement of Profit and Loss (Mandatory)
2. Balance Sheet (Mandatory)
3. Cash Flow Statement (Not Mandatory)
• Notes to Account on Statement of Profit and Loss and Balance Sheet: Before you prepare Profit
and Loss statement and Balance Sheet, you need to have a working notes for each and every
content. Note is prepared for multiple items.
• General format does not apply to Insurance, banking and electricity companies and any other act
which are governed by separate Act.
1. Profit and Loss Statement: This statement brings out the net profit earned or losses incurred
during the period under consideration. It is prepared for the year ended 31-03-2018.
It’s a Flow Concept (for a defined period).
1. Balance Sheet: This is also known as statement of affairs or position. This statement brings out
details of Assets owned and Liabilities owned by the organisation. It is prepared as on 31.03.2018.