MODULE 2

COMPANY ACCOUNTS – ISSUE OF SHARES

TWO MARK QUESTIONS

1. What is a company?

The Companies Act 2013 of India defines a company as- “A registered association which
is an artificial legal person, having an independent legal, entity with a perpetual
succession, a common seal for its signatures, a common capital comprised of transferable
shares and carrying limited liability”.

2. Define prospectus

According to the Companies Act, 2013 [section 2(70)], a Prospectus can be defined as
“any document which is described or issued as a prospectus”. This also includes any
notice, circular, advertisement or any other document acting as an invitation to offers
from the public. Such an invitation to offer should be for the purchase of any securities of
a corporate body.

3. List out the statutory books of a company

(a )Register of the Company.

(b)Register of Members.
(c)Register of Directors and Key Managerial Personnel.
(d)Register of Charges.
(e)Register of Renewed and Duplicate Share Certificates.
(f)Register of Employee Stock Options.
(g)Register of Shares/Other Securities Bought Back.

4. What are the main divisions of share capital?

(a) Nominal or Registered or Authorised capital – the amount with which the company is
registered. It is the maximum amount which the company is authorized to raise from
public . it is the total of the nominal value of shares issued by the company
(b) Issued capital – that part of authorized capital which is issued to the public for
subscription.
(c) Subscribed capital - That part of issued capital which is actually applied for by the
general public.
(d) Called up capital – that part of subscribed capital which is demanded by the company
to be paid by the share holders.
(e) Paid up capital – that part of called up capital that is actually paid by the share
holders. This amount forms part of share capital in the balance sheet. The unpaid part
 is called calls-in-arrears. Thus, paid up capital can be calculated as called up
capital minus calls-in-arrears.
(f) Reserve capital – that part of authorized capital which is kept uncalled by the
company. This will be called up at the time of winding up of the company. No entries
are recorded for this. It is shown in B/S as a note.

5. Write the journal entries for issue of shares against purchase of asset
Asset a/c Dr.
To Share capital
(Being --- shares allotted against purchase of ----)
6. Give the purposes for which security premium can be utilized by the company
(a) For issue of fully paid shares to the members of the company
(b) For writing off preliminary expenses of the company
(c) For writing off expenses on issue, commission, discount on issue of shares or
debentures.
(d) For providing premium payable on redemption of redeemable preference shares or
debentures and
(e) For purchase of its own shares (buy back)
7. How is excess application money received adjusted by the company?
Excess application money will be adjusted to the next stages like allotment, call money
etc.. Even after adjusting to these stages, if there is balance amount, it will be refunded to
the share holder.
8. What is calls- in- arrears?
If the share holder is not paying the money demanded by the company at different stages
like allotment, first call, second call etc…, such unpaid amount is called calls-in-arrears.
It is debited while recording journal entry as it is an amount yet to be received. It is
shown as a deduction from called up capital to calculate paid up capital. Interest is
charged by the company for the defaulted days.
9. What is calls-in-advance?
When a share holder makes the payment before the call is made by the company, such
amount is called calls-in-advance. It is credited while recording journal entry as the
company is receiving the amount before it is due. It is adjusted when the calls are made.
Interest is paid on the amount til the call is due.
10. What are the interest rates for calls-in-advance and calls-in-arrears?
On calls-in-advance, the company pays interest @6% p.a. on calls-in-arrears, they charge
interest @5% p.a.
11. What is forfeiture of shares?
When a share holder makes default in payment of call money, the company sends
reminders. Even after getting the reminder, if he is not making the payment, the company
cancels the shares held by him. Such cancellation of shares for non-payment of call
money is called forfeiture of shares. The amount already paid by the share holders will
 not be refunded. It is treated as a capital profit of the company. It is shown under a
separate head named “Forfeited shares Account”.

12. What are the journal entries for forfeiture and re-issue of forfeited shares?
(a) Share capital a/c Dr. (called up value)
Securities Premium a/c Dr. (if not received)
To Unpaid calls account
To Share forfeited a/c
(--- shares forfeited for non-payment of ----)
(b) Bank a/c Dr.
Forfeited shares a/c Dr. (loss on reissue)
To share capital
To Security premium (if issued at premium)
(c) Forfeited shares a/c Dr.
To Capital Reserve
(Balance in forfeited shares account transferred to capital reserve)

13. Distinguish between “Capital Reserve” and “Reserve Capital”

Basis For Capital Reserve Reserve capital
Comparison
Meaning The profit earned by the company The part of uncalled capital,
through special transaction, that is that is called up only on the
not available for distributing event of company's
dividend to shareholders is known liquidation is known as
as Capital Reserve. Reserve Capital.
Created out of Capital profits Authorized capital
Disclosure On the equity & liabilities side of Not disclosed at all
the balance sheet under the head
Reserve and Surplus.
Need of creation Mandatory Voluntary
Specific condition No such conditions Special Resolution should
be passed at AGM
Utilization To write off fictitious assets or Only when the company is
capital losses etc. about to wind up.
4 MARKS QUESTIONS
1. Distinguish between equity share and preference share.

BASIS FOR EQUITY SHARES PREFERENCE SHARES

COMPARISON

Meaning Ordinary shares of the Shares that carry

company representing the preferential rights on the
part ownership of the matters of payment of
shareholder in the dividend and repayment of
company. capital.
Payment of dividend Paid after the payment of Priority in payment over
all liabilities. equity shareholders.
Repayment of capital In the event of winding up In the event of winding up
of the company, equity of the company, preference
shares are repaid at the shares are repaid before
end. equity shares.
Rate of dividend Fluctuating Fixed

Redemption No Yes

Voting rights Equity shares carry voting Normally, preference shares

rights. do not carry voting rights.
However, in special
circumstances, they get
voting rights.
Convertibility Equity shares can never be Preference shares can be
converted. converted into equity shares.
Arrears of Dividend Equity shareholders have Preference shareholders
no rights to get arrears of generally get the arrears of
the dividend for the dividend along with the
previous years. present year's dividend, if
not paid in the last previous
year, except in the case of
non-cumulative preference
shares.

2. What are the characteristics of a company?

(a) Incorporated association: A company comes into existence when it is registered
under the Companies Act (or other equivalent act under the law). A company has
to fulfil requirements in terms of documents (MOA, AOA), shareholders,
directors, and share capital to be deemed as a legal association.
 (b) Artificial Legal Person: In the eyes of the law, A company is an artificial legal
person which has the rights to acquire or dispose of any property, to enter into
contracts in its own name, and to sue and be sued by others.
(c) Separate Legal Entity: A company has a distinct entity and is independent of its
members or people controlling it. A separate legal entity means that only the
company is responsible to repay creditors and to get sued for its deeds. The
individual members cannot be sued for actions performed by the company.
Similarly, the company is not liable to pay personal debts of the members.
(d) Perpetual Existence: Unlike other non-registered business entities, a company is a
stable business organisation. Its life doesn’t depend on the life of its shareholders,
directors, or employees. Members may come and go but the company goes on
forever.
(e) Common Seal: A company being an artificial legal person, uses its common seal
(with the name of the company engraved on it) as a substitute for its signature.
Any document bearing the common seal of the company will be legally binding
on the company.
(f) Limited Liability: A company may be limited by guarantee or limited by shares.
In a company limited by shares, the liability of the shareholders is limited to the
unpaid value of their shares. In a company limited by guarantee, the liability of
the members is limited to the amount they had agreed upon to contribute to the
assets of the company in the event of it being wound up.
3. What are the types of company?
(a) Chartered Companies - These companies are formed under a special charter
by the monarch or by a special order of a king or a queen. Few examples of
royal chartered companies are BBC, East India Company, Bank Of England,
etc.

(b) Statutory Companies - These companies are incorporated by a special act

passed by the central or state legislature. These companies are intended to
carry out some business of national importance. For example, The Reserve
Bank of India was formed under RBI act 1934.

(c) Registered or Incorporated Companies - These companies are

formed/incorporated under the companies act passed by the
government. These companies come into existence only after these are
registered under the act and the certificate of incorporation is passed by the
Registrar of companies.

(d) Companies Limited By Shares - These companies have a defined share capital
and the liability of each member is limited by the memorandum to the extent
of the face value of shares subscribed by him.

(e) Companies Limited By Guarantee - These companies may or may not have a
share capital and the liability of each member is limited by the memorandum
to the extent of the sum of money s/he had promised to pay in the event of
 liquidation of the company for payments of debts and liabilities of the
company.

(f) Unlimited Companies - There is no formal restriction to the amount of money

that the shareholder/member of the company has to pay in the event of the
liquidation of an unlimited company.

(g) Public Company (or Public Limited Company) - A public company is a

corporation whose ownership is open to the public. In other words, anyone
can buy the shares of a public company. There are no restrictions to the
number of members of a public company or to the transferability of shares.

(h) Private Company (or Private Limited Company) - A private company cannot
be owned by the public; it restricts the number of members, the right to
transfer its shares and prohibits any invitation to the public to subscribe for
any shares or debentures of the company.

(i) One Person Company - A one-person company is an Indian private limited

company which has only one founder/promoter. The founder should be a
natural person who is a country resident. There is also a threshold of paid-up
capital (₹ 50 lakh) and average turnover (₹ 2 crores in 3 immediate preceding
financial years) for a one-person

4. Distinguish between private company and public company

Basis for Public company Private company
comparison
Meaning A public company is a company A private company is a
which is owned and traded publicly company which is owned
and traded privately.
Minimum 7 2
members
Maximum Unlimited 200
members
Minimum 3 2
Directors
Suffix Limited Private Limited
Start of business After receiving certificate of After receiving certificate
incorporation and certificate of of incorporation
commencement of business.
Statutory Compulsory Optional
Meeting
Issue of Obligatory Not required
prospectus /
Statement in
lieu of
prospectus
 Public Allowed Not allowed
subscription
Quorum at 5 members must present in person. 2 members must present in
AGM person.
Transfer of Free Restricted
shares

5. What are the types of shares?

(1)Preference Shares

As the name suggests, this type of share gives certain preferential rights as compared to
other types of share. The main benefits that preference shareholders have are:

• They get first preference when it comes to the payout of dividend, i. e. a share of the
profit earned by the company.
• When the company winds up, preference shareholders have the first right in terms of
getting repaid

• Sub- types in preference shares:

(a) Cumulative preference shares:Cumulative shareholders have the right to receive arrears
on dividend before any dividend is paid to equity shareholders. For example, if the
dividends on preference shares for the year 2017 and 2018 have not been paid due to
market downturns, preferential shareholders are entitled to receive dividend for all
preceding years in addition to the current one.
(b) Non-cumulative preference shares:Non-cumulative shareholders cannot claim any
outstanding dividend. These shareholders only earn a dividend when the company earns
profits. No dividends are paid for the prior years.

(c) Convertible preference shares:As the name suggests, these shares are convertible.
Convertible shareholders can convert their preference shares into equity shares at a
specific period of time. However, the conversion of shares will need to be authorized by
the Articles of Association (AoA) of the company.

(2) Equity Shares

Equity shares are also known as ordinary shares. The majority of shares issued by the company
are equity shares. This type of share is traded actively in the secondary or stock market. These
shareholders have voting rights in the company meetings. They are also entitled to get dividends
declared by the board of directors. However, the dividend on these shares is not fixed and it may
vary year to year depending on the company’s profit. Equity shareholders receive dividends after
preference shareholders.
(3) Differential Voting Right (Dvr) Shares

The DVR shareholders have less voting rights compared to equity shareholders. To dilute the
voting privileges, companies provide extra dividend to DVR shareholders. As DVR shares have
less voting rights, their prices are also low. The price gap between equity shares and DVR shares
is almost 30-40%.