CORPORATE ACCOUNTING

ASSIGNMENT-1
S O U R C E O F C A P I TA L O F A C O M PA N Y

S U B M I T T E D T O - H I M A M I S S
S U B M I T T E D B Y - K R I S H N A P R I Y A P
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2 ND B C O M F T A
S O U R C E O F C A P I TA L
O F A C O M PA N Y
A company’s sources of capital are very important for its growth and
expansion. There are various sources of capital that a company can
choose, each with its own advantages and disadvantages. Firstly,
internal sources of capital include retained earnings. Retained earnings
are profits reinvested in the business and debtors, who provide a source
of short- term capital through the sale of assets, such as property,
equipment. Additionally cost cutting measures and efficiency
improvements can also free up internal capital.

External sources of capital are equally important and include equity

financing, where company issues shares to investors, providing a
permanent source of capital. This can be done through initial public
offerings (IPOs), rights issues, or private placements. Debt financing is
another external source of capital, where companies borrow funds from
lenders, such as banks, bondholders, or debenture holders. This can
take the form of short-term loans, long-term loans, or bonds. Companies
can also access capital through alternative sources, such as venture
capital, private equity, or crowdfunding. These sources often provide
capital to early-stage companies or those with high growth potential.

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TYPES OF SHARES

SHARES
Shares are units of ownership in a company, and
they come in various types, each with distant
characteristics and benefits. The main types of
shares are equity shares, preference shares,
deferred shares and bonus shares
EQUITY SHARES
The equity shares or ordinary shares are those shares on which the
dividend is paid after the dividend on fixed rate has been paid on
preference shares. The share holders who hold equity shares are
considered the real owners off the company and have voting rights to
participate in major company decisions.

FEATURES
1. Ownership rights: equity share holders are the real owners of the
company.

2. No fixed maturity: equity shares exist as long as the company

operates.

3. Dividend based on profit: dividend are not fixed and depend on

company profits.

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 A D VA N TA G E S A N D
D I S A D VA N TA G E S
Advantages
1.Limited liability: shareholders are not personally liable beyond their investment.

2.Voting rights: equity share holders have the right to vote on company matters.

3. Liquidity: Equity shares can be sold in the secondary market, giving investors flexibility
to convert their holdings to cash.

4.Dividends: Shareholders receive a distribution of a company's surplus profits.

Disadvantages
1.No guaranteed returns: unlike fixed income investments, equity shares do not guarantee
returns.

2.Last priority in liquidation: equity share holders are paid only after all debts and liabilities
are cleared.

3.High risk: returns depend on company performance, losses are possible.

4.Market volatility: the value of equity shares is subject to market fluctuations.

PREFERENCE SHARES
Preference shares are a type of company share that gives fixed dividends to share holders before any
payment is made to equity shareholders. They have higher claim on company assets and earnings but
usually lack voting rights.

Features
1.Fixed dividend: preference shareholders receive a predetermined dividend before equity shareholders.

2.Priority in asset distribution: in the event of liquidation, preference shareholders have higher claim on the
company’s assets.

3.No voting rights: preference shareholders do not have voting rights in the company

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A D VA N TA G E S A N D
ADVANTAGES

1.Regular income: fixed dividends provide a steady source of

D I S A D VA N TA G E S income.

2.Convertible options: some preference shares can be

converted into equity shares.

3.Lower risk: preference shares are generally considered less

risky than ordinary shareholders.

4.Priority in liquidation: in case of winding up, preference

shareholders get paid before equity shareholders.

DISADVANTAGES

1.NO VOTING RIGHTS: SHAREHOLDERS CANNOT

PARTICIPATE IN COMPANY DECISIONS.

2.LESS LIQUIDITY: NOT AS ACTIVELY TRADED IN STOCK

MARKETS COMPARED TO EQUITY SHARES.

3.FIXED RETURNS ONLY: UNLIKE EQUITY SHARES,

PREFERENCE SHAREHOLDERS DO NOT BENEFIT FROM
RISING COMPANY PROFITS.

4.LACK OF CAPITAL APPRECIATION: PREFERENCE SHARES

GENERALLY DO NOT EXPERIENCE THE SAME LEVEL OF
CAPITAL

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 TYPES OF PREFERENCE SHARES
1.Non-participating cumulating of dividend

A. Cumulative preference shares- They are those shares on which dividend at a fixed rate goes on cumulating till it is all
paid.

B. Non-cumulative preference shares- These are those shares on which dividend does not cumulate.

2.On the basis of conversion

A. Convertible preference share-shareholders can exchange their preference shares for common shares at a fixed rate.

B. Non convertible preference share- the holders cannot convert their preference shares into equity shares.

3. On the basis of redemption

A. redeemable preference shares-the company has the option to buy back these shares at a specified price and date.

B. non redeemable preference shares- these shares cannot be bought back by the company.

4. On the basis of participation

A. participating preference shares-this type of shares are allowed to participate in surplus profits of the company and
surplus assets during winding up.

B. non-participating preference shares- these are not to be purchased by the company during its lifetime .

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DEFERRED SHARES
A deferred share is a share that does not have any rights to the assets of the company undergoing bankruptcy until
all common and preferred shareholders are paid. These shares are held by Founders or beginner of the company

FEATURES
1. Convertible-Convertible deferred shares can be converted into another class of shares, typically common stock,
once predefined conditions are satisfied.

2. Use in Capital Restructuring: They can be used in capital restructuring, in conjunction with other share types, to
achieve specific outcomes for the company.

3. Use in Executive Compensation: Deferred shares are often used as part of executive compensation packages

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A DVA N TA G E S A N D D I S A DVA N TA G E S
ADVANTAGES

1.Lomg term alignment- deferred shares can effectively align the interest of executives and key employees with the
long-term success of the company

2.Tax Advantages: Depending on the jurisdiction and specific plan, deferred shares may offer certain tax advantages,
particularly concerning capital gains.

3. Retention Tool: They serve as a powerful retention tool, incentivizing key personnel to remain with the company for
a specified period to realize the full value of their shares.

DISADVANTAGES

1.Limited Rights: In some cases, deferred shares may carry limited or no voting rights, reducing the

holder's influence on company decisions.

2. Restrictions and Conditions: Deferred shares often involve various restrictions such as vesting periods,
performance-bas criteria, or market price thresholds.

3. Lack of Liquidity: Depending on the terms of the deferred shares, they may not be easily sold or traded, limiting the

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holder's access to immediate cash.
DIFFERENCE BETWEEN EQUITY SHARE
AND PREFERENCE SHARE

Equity share Preference share

Preference share offers

Equity share represent actual preferential rights, but not the
ownership in a company same level of ownership as equity
shares
Dividends are not fixed and
depend on the company’s Dividends are fixed
profitability

Equity shareholders have voting Preference shareholders usually

rights do not have voting rights

Generally considered risker, as

Generally considered less risky
their value can fluctuate

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A company’s share capital is divided into different categories based on how shares are issued,
subscribed and paid for. The main types of share capital are as follows:

1.AUTHORISED CAPITAL

Authorized capital represents the maximum amount of share capital that a company is legally
permitted to issue to its shareholders.

2.ISSUED CAPITAL

issued capital refers to the portion of a company's authorized capital that has actually been offered
and distributed to shareholders.

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3.SUBSCRIBED CAPITAL

Subscribed capital represents the portion of a company's issued capital that investors have formally agreed
to purchase. Sometimes, not all issued shares are taken up by investors, leaving a portion unsubscribed.

4.PAID-UP SHARE CAPITAL

Paid-up share capital represents the actual amount of money that a company has received from its
shareholders in exchange for the shares of its stock.

5.RESERVE CAPITAL

Reserve capital is a specific portion of a company's subscribed but uncalled capital that the company
designates to be called upon only in the event of liquidation.

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OVER SUBSCRIPTION

Oversubscription happens when the demand for a company's shares exceeds the number of shares that the
company is offering. In other words, investors want to buy more shares than are available. This most frequently
occurs during an Initial Public Offering (IPO), when a company first offers its shares to the public.

UNDER SUBSCRIPTION

Undersubscription happens when the number of shares that investors want to buy is less than the number of
shares that the company is offering. This means that the company has failed to attract enough buyers to purchase
all of the available shares.

MINIMUM SUBSCRIPTION

Minimum subscription is the minimum amount of capital that a company must raise from its share offering before it
can proceed with allotment of shares. It's a threshold set to ensure that the company has enough funds to carry
out its intended projects and operations.

CALLS IN ARREAR

Calls in arrears refers to a specific financial situation that arises when a company issues shares and requests
payment in installments. Calls in arrears occur when a shareholder fails to pay a required installment by the
specified due date.

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CALLS IN ADVANCE
Calls in advance refer to situations where shareholders pay a portion of their share
capital before it's officially required by the company. In other words, they're making
an early payment for future installments of their shares.

FORFEITURE OF SHARE
Forfeiture of shares is the process by which a company cancels a shareholder's
shares due to their failure to pay the required "call" amounts on those shares.

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DEBENTURES MEANING
A DEBENTURE IS A DEBT INSTRUMENT ISSUED BY A
COMPANY TO RAISE FUNDS. ESSENTIALLY, IT'S A LOAN
THAT A COMPANY TAKES FROM THE PUBLIC. DEBENTURE
HOLDERS ARE CREDITORS OF THE COMPANY, NOT
OWNERS. THIS IS A KEY DISTINCTION FROM
SHAREHOLDERS. DEBENTURES TYPICALLY CARRY A FIXED
RATE OF INTEREST, WHICH THE COMPANY IS OBLIGATED
TO PAY. FEATURES

1.DEBT INSTRUMENT: DEBENTURES ARE FUNDAMENTALLY

A FORM OF DEBT. THEY REPRESENT A LOAN TAKEN BY
THE ISSUING COMPANY.

2.FIXED INTEREST RATE : DEBENTURES TYPICALLY

CARRY A PREDETERMINED, FIXED RATE OF INTEREST,
PROVIDING A PREDICTABLE INCOME STREAM FOR
INVESTORS.

3.NO OWNERSHIP RIGHTS: DEBENTURE HOLDERS ARE

CREDITORS, NOT OWNERS, OF THE COMPANY.

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4.NO VOTING RIGHTS: THEY DO NOT HAVE VOTING RIGHTS
DISTINCTION BETWEEN DEBENTURES
AND SHARES
SHARES DEBENTURES

Represent ownership in a Represent a loan to a company(debt).

company(equity).
Shareholders are owners of the Debenture holders are creditors of the
company. company.
Shareholders receive dividends, Debenture holders receive fixed
which are dependent on the interest payment, regardless of the
company’s profitability. company’s profitability.
Shareholders typically have voting Debenture holders do not have voting
rights. rights.
Generally considered riskier, as their Generally considered less risky than
value can fluctuate significantly. shares, as they offer fixed returns.

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TYPES OF DEBENTURES
SECURED DEBENTURE: these debentures are backed by the
company’s assets as collateral.
BASED ON
SECURITY
UNSECURED DEBENTURES: these are not backed by any specific
assets. They rely solely on the company’s creditworthiness.

CONVERTIBLE DEBENTURES: These debentures can be converted into

DEBENTURES

equity shares of the company at a predetermined ratio and time.

BASED ON
CONVERTABILITY
NON -CONVERTIBLE DEBENTURES: These debentures cannot be
converted into equity shares.

REDEEMABLE DEBENTURES: These debentures have a fixed maturity

date. The company will repay the principal amount to the debenture
BASED ON holders.
REDEMPTION
IRREDEMABLE DEBENTURES: these debentures do not have a fixed
maturity date. The company pays interest indefinitely.

REGISTERED DEBENTURES: These debentures are recorded in the

company’s register, and the interest is paid to the registered holder.
BASED ON
REGISTRATION
BEARER DEBENTURES: These debentures are tranferable by mere

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JOURNAL ENTRIES FOR RECORDING THE
ISSUE OF DEBENTURES

DEBENTURES ISSUED AT PAR

Bank a/c dr
To debentures a/c

DEBENTURES ISSUED AT A PREMIUM

Bank a/c dr
To debentures a/c
To securities premium reserve a/c
DEBENTURES ISSUED AT A DISCOUNT

Bank a/c dr
Discount on issue of debenture a/c dr
To debentures a/c

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T H A N K YO U