Study material / Guidelines

For B,com 3rd year

Corporate accounting
Unit 1

Accounting for share capital and debentures

Share Capital of a Company

A company, being an artificial person, cannot generate its own capital which has
necessarily to be collected from several persons. These persons are known as
shareholders and the amount contributed by them is called share capital. Since
the number of shareholders is very very large, a separate capital account cannot
be opened for each one of them. Hence, innumerable streams of capital
contribution merge their identities in a common capital account called as ‘Share
Capital Account’.
Categories of Share Capital
From accounting point of view the share capital of the company can be classified
as follows:
Authorised Capital: Authorized capital is the amount of share capital which a
company is authorised to issue by its Memorandum of Association. The
company cannot raise more than the amount of capital as specified in the
Memorandum of Association. It is also called Nominal or Registered capital. The
authorised capital can be increased or decreased as per the procedure laid down
in the Companies Act. It should be noted that the company need not issue the
entire authorised capital for public subscription at a time. Depending upon its
requirement, it may issue share capital but in any case, it should not be more
than the amount of authorised capital.
• Issued Capital: It is that part of the authorised capital which is actually issued
to the public for subscription including the shares allotted to vendors and the
signatories to the company’s memorandum. The authorised capital which is not
offered for public subscription is known as ‘unissued capital’. Unissued capital
may be offered for public subscription at a later date.
• Subscribed Capital: It is that part of the issued capital which has been
actually subscribed by the public. When the shares offered for public
subscription are subscribed fully by the public the issued capital and
subscribed capital would be the same. It may be noted that ultimately, the
subscribed capital and issued capital are the same because if the number of
share, subscribed is less than what is offered, the company allot only the
number of shares for which subscription has been received. In case it is higher
than what is offered, the allotment will be equal to the offer. In other words,
the fact of over subscription is not reflected in the books.
• Called-up Capital: It is that part of the subscribed capital which has been
called up on the shares. The company may decide to call the entire amount or
part of the face value of the shares. For example, if the face value (also called
nominal value) of a share allotted is Rs. 10 and the company has called up only
Rs. 7 per share, in that scenario, the called up capital is Rs. 7 per share. The
remaining Rs. 3 may be collected from its shareholders as and when needed.
• Paid-up Capital: It is that portion of the called up capital which has been
actually received from the shareholders. When the shareholders have paid all
the call amount, the called-up capital is the same to the paid-up capital. If any
of the shareholders has not paid amount on calls, such an amount may be
called as ‘calls in arrears’. Therefore, paid-up capital is equal to the called-up
capital minus call-in-arrears.
• Uncalled Capital: That portion of the subscribed capital which has not yet been
called-up. As stated earlier, the company may collect this amount any time when
it needs further funds.
Reserve Capital: A company may reserve a portion of its uncalled capital to be
called only in the event of winding up of the company. Such uncalled amount is
called ‘Reserve Capital’ of the company. It is available only for the creditors on
winding up of the company
Issue of Shares
A salient characteristic of the capital of a company is that the amount on its
shares can be gradually collected in easy instalments spread over a period of
time depending upon its growing financial requirement. The first installment is
collected along with application and is thus, known as application money, the
second on allotment (termed as allotment money), and the remaining
installment are termed as first call, second call and so on. The word final is
suffixed to the
last installment. However, this in no way prevents a company from calling the
full amount on shares right at the time of application.
The important steps in the procedure of share issue are :
• Issue of Prospectus: The company first issues the prospectus to the public.
Prospectus is an invitation to the public that a new company has come into
existence and it needs funds for doing business. It contains complete
information about the company and the manner in which the money is to be
collected from the prospective investors.
• Receipt of Applications: When prospectus is issued to the public, prospective
investors intending to subscribe the share capital of the company would make
an application along with the application money and deposit the same with a
scheduled bank as specified in the prospectus. The company has to get minimum
subscription (Refer Box1) within 120 days from the date of the issue of the
prospectus. If the company fails to receive the same within the said period, the
company cannot proceed for the allotment of shares and application money
should be returned within 130 days of the date of issue of prospectus.
• Allotment of Shares: If minimum subscription has been received, the company
may proceed for the allotment of shares after fulfilling certain other legal
formalities. Letters of allotment are sent to those whom the shares have been
allotted, and letters of regret to those to whom no allotment has been more.
When allotment is made, it results in a valid contract between the company and
the applicants who now became the shareholders of the company.
Forfeiture of Shares
It may happen that some shareholders fail to pay one or more instalments, viz.
allotment money and/or call money. In such circumstances, the company can
forfeit their shares, i.e. cancel their allotment and treat the amount already
received thereon as forfeited to the company within the framework of the
provisions in its articles. There provisions are usually based on Regulations 29 to
35 of the Table A which authorize, the directors to forefeet the shares for
nonpayment of calls made. For this purpose, they have to strictly follow the
procedure laid down in this regard.
When shares are forfeited all entries relating to the shares forfeited, except
those relating to premium, already recorded in the accounting records, must be
reversed. Accordingly, share capital account is debited with the amount called
up in respect of shares are forfeited and crediting (i) the respective unpaid calls
account’s or calls in arrears account, as the case may be will the unpaid amount,
and (ii) share forfeited account with the amount already received. Thus, the
journal entry will be as follows:
Share Capital A/c Dr.
To Share Forfeiture A/c
To Share Allotment A/c
To Share Calls A/c (individually)
(..... shares forfeited for non-payment of
allotment money and calls made)
Note : In case ‘Calls-in-Arrears’ account is maintained by a company, ‘Calls-in-
Arrears’
account would be credited in the above entry instead of ‘Share Allotment’
and/or ‘Share Call or Calls’ account.
The balance of shares forfeited account is shown as an addition to the total paid-
up capital of the company under the heading ‘Share Capital’ on the liabilities
side of the balance sheet till the forfeited shares are reissued.
Book building : it is the process by which corporate determine the demand and
price of proposed issue of securities through public bidding
Rights issue : A rights issue is an issue of rights to buy additional securities in a
company made to the company's existing security holders. When the rights are
for equity securities, such as shares, in a public company, it is a way to raise
capital under a seasoned equity offering. Rights issues are sometimes carried
out as a shelf offering. With the issued rights, existing security-holders have the
privilege to buy a specified number of new securities from the firm at a specified
price within a specified time. In a public company, a rights issue is a form of
public offering (different from most other types of public offering, where shares
are issued to the general public

BONUS ISSUE
Subject to the provisions of the Companies Act, 1956 or any other applicable law
for the time being in force, a listed issuer may issue bonus shares to its members
if:
(a) it is authorised by its articles of association for issue of bonus shares,
capitalization of reserves, etc.: Provided that if there is no such provision in the
articles of association, the issuer shall pass a resolution at its general body
meeting making provisions in the articles of associations for capitalization of
reserve;
(b) it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
(c) it has sufficient reason to believe that it has not defaulted in respect of the
payment of statutory dues of the employees such as contribution to provident
fund, gratuity and bonus;
(d) the partly paid shares, if any outstanding on the date of allotment, are made
fully paid up
Buy-Back of Shares :
A share buyback occurs when a business purchases its own shares and then
either cancels them or holds them in treasury for re-issue at a later date. To
implement a buyback, a business may acquire its shares in the open market in
much the same way as any other investor. It may, however, make a proportional
offer, where a set proportion from each investor is purchased, or a universal
tender offer, where a fixed number of shares is acquired at a particular price.
When a company purchased its own shares, it is called ‘Buy- Back of Shares’.
Section 77A of the Companies Act, 1956 provides such a facility to the
companies and can buy its own shares from either of the following :
(a) Existing equity shareholders on a proportionate basis
(b) Open Market
(c) Odd lot shareholders
(d) Employees of the company

Redemption of preference shares

Section 85 of companies act provides for issue and redemption of preference
shares
According to section 80 a company limited by share may issue preference shares
which are at the option of the company liable to be redeemed. Provided the
following conditions
`1.such shares are redeemed either out of the profit of company or by fresh
issue of
shares
2 such shares must be fully paid
Issue of Debentures
The procedure for the issue of debentures is the same as that for the issue of
shares. The intending investors apply for debentures on the basis of the
prospectus issued by the company. The company may either ask for the entire
amount to be paid on application or by means of instalments on application, on
allotment and on various calls. Debentures can be issued at par, at a premium
or at a discount. They can also be issued for consideration other than cash or as
a Collateral Security.
Redemption of Debentures
Redemption of debentures refers to extinguishing or discharging the liability on
account of debentures in accordance with the terms of issue. In other words
redemption of debentures means repayment of the amount of debentures by
the company. There are four ways by which the debentures can be redeemed.
These are :
1. Payment in lump sum
2. Payment in instalments
3. Purchase in the open market
4. By conversion into shares or new debentures
2 Final accounts
FINAL ACCOUNTS
So far, we have discussed that how the business transactions are recorded in
Journal and ledger and how to detect and rectify the errors and how to prepare
Trial Balance. Is quite natural that the businessman is interested in knowing
whether his business is running on Profit or Loss and also the true financial
position of his business. The main aim of Bookkeeping is to inform the
Proprietor, about the business progress and the financial position at the right
time and in the right way. Preparation of Final accounts is highly possible only
after the preparation of Trial Balance.

Final Accounts

Trading & Profit and Loss A/c / Balance sheet

1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss.
2. Balance Sheet is prepared to find out financial position as if concern.
Trading and P&L A/c and Balance sheet are prepared at the end of the year or
at end of the part. So it is called Final Account. Revenue account of trading
concern is divided into two-part i.e.
1. Trading Account and
2. Profit and Loss Account.
TRADING ACCOUNT
Trading refers buying and selling of goods. Trading A/c shows the result of
buying and selling of goods. This account is prepared to find out the difference
between the Selling prices and Cost price. If the selling price exceeds the cost
price, it will bring Gross Profit. For example, if the cost price of Rs. 50,000 worth
of goods are sold for Rs. 60,000 that will bring in Gross Profit of Rs. 10,000. If the
cost price exceeds the selling price, the result will be Gross Loss. For example, if
the cost price Rs. 60,000 worth of goods are sold for Rs. 50,000 that will result
in Gross Loss of Rs. 10,000. Thus the Gross Profit or Gross Loss is indicated in
Trading Account
PROFIT AND LOSS ACCOUNT
Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to
credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the
Profit Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss
A/c reveals Net Profit or Net loss at a given time of accounting year.
Items appearing on Debit side of the Profit & Loss A/c
The Expenses incurred in a business is divided in two parts. i.e. one is Direct
expenses are recorded in trading A/c., and another one is Indirect expenses,
which are recorded on the debit side of Profit & Loss A/c. Indirect Expenses are
grouped under four heads:
1. Selling Expenses: All expenses relating to sales such as Carriage outwards,
Travelling Expenses, Advertising etc.,
2. Office Expenses: Expenses incurred on running an office such as Office
Salaries, Rent, Tax, Postage, Stationery etc.,
3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs
and Renewals, Depreciation etc.
4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few
examples for Financial Expenses.
Item appearing on Credit side of Profit and Loss A/c.
Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and
incomes of the business are shown on the credit side. Typical of such gains are
items such as Interest received, Rent received, Discounts earned, Commission
earned.
BALANCE SHEET
Trading A/c and Profit & Loss A/c reveals G.P. or G.L and N.P or N.L respectively,
Besides the Proprietor wants
i. To know the total Assets invested in business
ii. To know the Position of owner’s equity
iii. To know the liabilities of business.
DEFINITION
The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets
and Liabilities of a business firm and which serves to ascertain the financial
position of the same on any particular date. “On the left hand side of this
statement, the liabilities and capital are shown. On the right hand side, all the
assets are shown. Therefore the two sides of the Balance sheet must always be
equal. Capital arrives Assets exceeds the liabilities.
OBJECTIVES OF BALANCE SHEET:
1. It shows accurate financial position of a firm.
2. It is a gist of various transactions at a given period.
3. It clearly indicates, whether the firm has sufficient assents to repay its
liabilities.
4. The accuracy of final accounts is verified by this statement
5. It shows the profit or Loss arrived through Profit & Loss A/c.
3 Valuation of goodwill

Goodwill ; Goodwill is the value of reputation of a business in respect of profit

expected in future over and above the normal level of profit earned by other
company belonging to the same class of business.in other words goodwill is the
present value of firms anticipated super normal earning
Methods of valuation of goodwill
average profit method ; under this method goodwill is valued on the basis of
certain no of years purchase of average profit of past few years
super profit method in this method future maintainable profits of the firm are
compared with normal profit of the firm
capitalization method in this method the value of good will is arrived by
capitalizing the super profit at normal rate of return
 Super profit *100/normal rate of return

4 Amalgamation of companies
Basically amalgamation the term amalgamation is used when two or more
existing companies go into liquidation and a new company is formed to take
over their business .But the absorption is used when one or more company go
into liquidation and one existing company takes over or purchases their business
.
Accounting standard 14 Defines Amalgamation as merging of company with
another or merging of 2 or more companies to form a new company or takeover
of one company by another .Hence amalgamation includes absorption in
amalgamation the assets and liabilities of one company transferor company are
amalgamated with those of transferee company
Amalgamation is of 2 types
• Amalgamation in nature of merger
• Amalgamation in nature of purchase

Internal reconstruction internal reconstruction means change in the ownership

,business mix asset mix and alliance with the view to enhance the shareholders’
value .Hence internal reconstructing may involve ownership reconstructing
,business reconstructing and asset reconstructing .corporate reconstructing is
done for following reasons
• Orderly redirect the firms activities
• Deploying surplus cash for one business to finance profitable growth in
another
• Reduce risk by revising portfolio
• Develop core competencies

5 Accounting of Holding companies

Holding companies: A holding company is one which acquires all or a majority

of equity shares of any other company called subsidiary company in order to
have control over subsidiary company. The acquisition of controlling interest by
holding company does not in any way affect the separate legal entity of
subsidiary company
Subsidiary company the company’s act 2013 defines subsidiary company as
company of which
• Other company controls the composition of its board of directors
• Other company holds more than half of nominal value of shares
Consolidated balance sheet Consolidated balance sheet means preparing single
balance sheet and profit and loss account of the holding company and the
subsidiary company by aggregating all items of assets ,liabilities, income
expenses etc. of holding company and its subsidiary .this is known as group
accounts
Accounting standard 21 Consolidated financial statement the objective of this
accounting standard is to lay down principles and procedures for preparation of
financial statements and for accounting for investment in subsidiary companies
in a separate financial statement .consolidated financial statement includes
balance sheet and profit and loss account and explanatory notes thereof of a
holding and subsidiary company presented in a single statement. Also following
disclosures should be made in consolidated financial statement A list of
subsidiaries and their address, proportion of ownership, interest, proportion of
voting power.
6 Accounting for banking companies

Banking" means the accepting, for the purpose of lending or investment, of

deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, and order or otherwise. "Banking Company"
means any company which transacts the business of banking.
Which include
Borrowing raising or taking up of money
Lending or advancing of money
Dealing in bills of exchange
Granting and issuing of letter of credit travellers cheque buying and selling of
foreign exchange etc.
Preparation of balance sheet by a banking company form A and schedule 3 of
banking regulation act 1949 governs the preparation of balance sheet by a
banking company .

format for balance sheet

• Source of fund Share capital Reserve and surplus Cr or Dr Sub total Deposits
a) Demand deposits
b) Term deposits
c) Deposits in other banks
• Borrowings
Other liabilities and provisions
Contingent liabilities
• Asset side
• Cash and balance with RBI
Balance with bank /money at call on short notice
Investments
Advances
Fixed assets
Other assets
• Non performing assets: non-performing asset is the advance given by the
bank of which interest /principal and installment remains overdue for the period
of 180 days ,The account of which borrower remains out of order for 180 days

7 MEANING OF FUNDS FLOW STATEMENT

It will be appropriate to explain the meaning of the term ‘Funds’ and the term
‘Flow of Funds’ before explaining the meaning of the term ‘Funds Flow
Statement’.
Meaning of Funds
The term ‘Funds’ has a variety of meanings. There are people who take it to be
synonymous with cash and to them there is no difference between a Funds Flow
Statement and a Cash Flow Statement. Others include marketable securities
besides cash in the definition of the term ‘Funds’.
The International Accounting Standard No. 7 on ‘Statement of Changes in
Financial Position’ also recognise the absence of a single, generally accepted,
definition of the term. According to the standard, ‘the term “fund” generally
refers to cash and cash equivalents, or to working capital.’ Of these, the last
definition of the term is by far the most common definition of ‘fund’. There are
also two concepts of working capital—gross concept and net concept. Gross
working capital refers to the firm’s investment in current assets while the term
net working capital means excess of current assets over current liabilities.1 It is
in the latter sense in which the term ‘funds’ is generally used. The meanings of
two terms ‘current assets’ and ‘current liabilities’ have already been explained
in a preceding chapter. However, for the sake of ready reference, we are giving
below the meanings of these two terms ‘current assets’ and ‘current liabilities’
besides explaining ‘non-current assets’ and ‘non-current liabilities.
MEANING OF CASH FLOW STATEMENT
A Cash Flow Statement is a statement depicting change in cash position from
one period to another. For example, if the cash balance of a business is shown
by its Balance Sheet on 31 December, 1997 at Rs 20,000 while the cash balance
as per its Balance Sheet on 31 December, 1998 is 30,000, there has been an
inflow of cash of Rs 10,000 in the year 1998 as compared to the year 1997. The
cash flow statement explains the reasons for such inflows or outflows of cash,
as the case may be. It also helps management in making plans for the immediate
future.
Presentation of A Cash Flow Statement
The cash flow statement should report cash flows during the period classified
by operating investing and financing activities.
• Operating activities. Cash flows from operating activities are primarily
derived from the principal revenue-producing activities of the enterprise.
Therefore, they generally result from the transactions and other events
that enter into the determination of net profit or loss
• Investing activities. Examples of cash flows arising from investing
activities are:
•Cash payments to acquire fixed assets (including intangibles).
These payments include those relating to capitalized research and
development costs and Self-constructed fixed assets;
• cash receipts from disposal of fixed assets (including intangibles);
• Cash payments to acquire shares, warrants, or debt instruments
of othe enterprises and interests in joint ventures (other than
payments for thos instruments considered to be cash equivalents
and those held for dealing or trading purposes); trading purposes,
or the receipts are classified as financing activities.
• Financing activities. Examples of cash flows arising from financing
activities are:
• cash proceeds from issuing shares or other similar instruments;
• cash proceeds from issuing debentures, loans, notes, bonds, and
other short or long-term borrowings; and
• Cash repayments of amounts borrowed.