<h5 id="11-features-of-a-company">1.1 Features of a Company</h5> <ul> <li>A company is a body corporate, formed according to the provisions of Company Law.</li> <li>It has a separate legal entity, distinct from its members, and can hold property, enter into contracts, and open bank accounts in its own name.</li> <li>The liability of members is limited to the unpaid amount on shares or the guarantee given in case of companies limited by guarantee.</li> <li>It enjoys perpetual succession, unaffected by changes in membership, and has a common seal as its official signature.</li> <li>Shares of a public limited company are freely transferable, and the company can sue or be sued in its name for contractual breaches.</li> </ul> <p>======</p> <h5 id="12-kinds-of-companies">1.2 Kinds of Companies</h5> <ul> <li>Companies can be classified based on liability of members into:</li> </ul> <ol> <li>Companies Limited by Shares: Liability is limited to nominal value of shares.</li> <li>Companies Limited by Guarantee: Liability is limited to amount guaranteed in winding up.</li> <li>Unlimited Companies: No limit on liability, creditors can claim dues from members.</li> </ol> <ul> <li>Companies can also be classified based on number of members into:</li> </ul> <ol> <li>Public Company: Not a private company or subsidiary of a private company.</li> <li>Private Company: Has restrictions on transfer of shares, limits members to 200.</li> <li>One Person Company (OPC): Has only one person as a member, with conditions on citizenship, activities, and capital.</li> </ol> <p>======</p> <h5 id="13-share-capital-of-a-company">1.3 Share Capital of a Company</h5> <ul> <li>A company, being an artificial entity, cannot generate its own capital and hence, it is collected from numerous individuals known as shareholders.</li> <li>The amount of capital contributed by the shareholders is termed as share capital.</li> <li>Due to a large number of shareholders, individual capital accounts cannot be opened; hence, all contributions merge into a common account known as the ‘Share Capital Account’.</li> <li>Shareholders are the owners of the company, and the extent of ownership depends on the number of shares held by them.</li> <li>Share capital is further divided into several categories like equity share capital, preference share capital, etc., based on the rights and obligations associated with them.</li> </ul> <p>======</p> <h5 id="131-categories-of-share-capital">1.3.1 Categories of Share Capital</h5> <ul> <li>Authorized Capital: The maximum amount of capital a company can issue, as stated in its Memorandum of Association. Also known as Nominal or Registered capital.</li> <li>Issued Capital: The portion of the authorized capital offered to the public for subscription. Unissued capital is the remaining authorized capital not offered for public subscription.</li> <li>Subscribed Capital: The portion of the issued capital subscribed by the public. If the number of subscribed shares is less than offered, the company allots only the subscribed shares.</li> <li>Called up Capital: The portion of the subscribed capital that the company asks shareholders to pay, through calls. The remaining unpaid amount is called calls in arrears.</li> <li>Paid up Capital: The portion of the called up capital that has been received from shareholders. If all called amounts are paid, paid up capital equals called up capital.</li> <li>Uncalled Capital: The portion of the subscribed capital not yet called up by the company. Reserve Capital is a portion of uncalled capital reserved for creditors in case of company winding up.</li> </ul> <p>Note: The given text includes an example of how share capital is shown in a balance sheet, but it is not included in the summary as per the instructions.</p> <p>======</p> <h5 id="14-nature-and-classes-of-shares">1.4 Nature and Classes of Shares</h5> <ul> <li>Shares represent units into which a company’s capital is divided, representing a fractional part of the share capital and forming the basis of ownership in a company.</li> <li>Shareholders are individuals who contribute money through shares.</li> <li>The number of shares and their classes, along with associated rights and obligations, are outlined in the Memorandum and Articles of Association.</li> <li>The Companies Act recognizes two types of shares: preference shares and equity shares (also known as ordinary shares).</li> <li>Preference shares and equity shares have different rights and obligations, with preference shares often having preferential treatment in terms of dividends and repayment of capital.</li> </ul> <p>======</p> <h5 id="141-preference-shares">1.4.1 Preference Shares</h5> <ul> <li>A preference share is defined by Section 43 of The Companies Act, 2013.</li> <li>It holds a preferential right to dividend, either as a fixed amount or a fixed rate of the nominal value, before dividend is paid to equity shareholders.</li> <li>It carries a preferential right to the repayment of capital before anything is paid to equity shareholders in case of winding up.</li> <li>Preference shares can be participating or nonparticipating, depending on the holder’s right to participate in the surpluses.</li> <li>They can also be cumulative or non-cumulative, and redeemable or irredeemable, as specified in the Memorandum or Articles of the company.</li> </ul> <p>======</p> <h5 id="142-equity-shares">1.4.2 Equity Shares</h5> <ul> <li>Equity shares are shares that do not have preferential rights in the payment of dividends or repayment of capital.</li> <li>Equity shareholders are entitled to share the distributable profits after preference shareholders’ dividend rights are satisfied.</li> <li>Dividends on equity shares are not fixed and can vary year to year based on profit availability.</li> <li>Equity share capital can be with or without voting rights, and with differential rights as to voting, dividend, or otherwise.</li> <li>Statements (d), (g), (h), and (i) are true: Companies’ shares are generally transferable, paid-up capital can exceed called-up capital, capital reserves are created from capital profits, and the maximum rate of securities premium is 10% at the time of issue of shares.</li> </ul> <p>======</p> <h5 id="15-issue-of-shares">1.5 Issue of Shares</h5> <ul> <li>The capital of a company can be gradually collected in instalments, with the first instalment collected along with the application, known as application money.</li> <li>The important steps in the procedure of share issue are: issue of prospectus, receipt of applications, and allotment of shares.</li> <li>Minimum subscription is the minimum amount that must be raised to meet the needs of business operations of the company. It cannot be less than 90% of the issued amount according to SEBI guidelines.</li> <li>When shares are issued more than its nominal value, the excess amount is called premium.</li> <li>Instalments for share capital may be collected at different stages, whether shares are issued at par or at a premium.</li> </ul> <p>======</p> <h5 id="16-accounting-treatment">1.6 Accounting Treatment</h5> <ul> <li>The amount received on application for shares is initially credited to a separate account called Share Application Account and then transferred to Share Capital Account when allotment is made.</li> <li>On allotment, allotment money is received from the applicants and the amount of application money received is transferred to Share Capital Account. Any excess application money is adjusted towards the amount due on allotment.</li> <li>In case of rejected applications, the application money is refunded to the applicant within the period prescribed by law/SEBI.</li> <li>If lesser number of shares are allotted than those applied for, the excess application money is adjusted towards the amount due on allotment from the allottees.</li> <li>When a combined account for share application and share allotment is maintained, journal entries are recorded in a combined account called ‘Share Application and Allotment A/c’.</li> </ul> <p>======</p> <h5 id="161-calls-in-arrears">1.6.1 Calls in Arrears</h5> <ul> <li>Calls in Arrears, also known as Unpaid Calls, refer to the amount not paid by a shareholder on the allotment or any of the calls.</li> <li>If a company maintains a ‘Calls in Arrears’ Account, it needs to pass a journal entry to bring the calls in arrears into account, debiting the Calls in Arrears Account and crediting the respective Share Accounts.</li> <li>Directors may be empowered by the Articles of Association to charge interest on calls in arrears at a stipulated rate. If the articles are silent, interest at a rate not exceeding 10% p.a. must be paid on all unpaid amounts on shares.</li> <li>On receiving the call amount with interest, the amount of interest is credited to the Interest Account, and the call money is credited to the respective Call Account or to the Calls in Arrears Account.</li> <li>No need to take the Interest on Calls in Arrears Account if nothing is specified, and the entry will be made to debit the Bank Account and credit the Calls in Arrears Account and Interest on Calls in Arrears Account.</li> </ul> <p>(Note: No need to provide the journal entries for the given illustration as it is not required as per the instructions.)</p> <p>======</p> <h5 id="162-calls-in-advance">1.6.2 Calls in Advance</h5> <ul> <li>“Calls in Advance” is the amount received from shareholders for calls yet to be made.</li> <li>It is a liability of the company, credited to ‘Call in Advance Account’, and adjusted towards call payment when due.</li> <li>The balance in ‘Calls in Advance’ account is shown under ‘current liabilities’ in the company’s balance sheet.</li> <li>If provided by the Articles, interest is payable on Calls in Advance from receipt to call due date.</li> <li>The rate of interest is generally stipulated in the Articles, or otherwise, Table F applies, providing for a rate not exceeding 12% per annum.</li> </ul> <p>======</p> <h5 id="163-over-subscription">1.6.3 Over Subscription</h5> <ul> <li>Over subscription occurs when applications for more shares of a company are received than the number offered to the public. This is often seen in well-managed and financially strong companies.</li> <li>Directors have 3 alternatives to deal with over subscription: accepting some applications in full and rejecting others, making a pro-rata allotment to all applicants, or adopting a combination of both.</li> <li>In the first alternative, rejected applications receive a full refund of the application money. Journal entries include debiting Bank A/c and crediting Share Application A/c for money received on applications, and debiting Share Application A/c and crediting Share Capital A/c and Bank A/c for transferring application money and refunding rejected applications.</li> <li>In the second alternative, excess application money is adjusted towards the amount due on allotment. If excess application money received is more than the amount due on allotment, the excess amount may be refunded or credited to calls in advance.</li> <li>In the third alternative, a combination of accepting some applications in full and making pro-rata allotment to others is adopted. Money on rejected applications is refunded, and excess application money received from applicants is adjusted towards the amount due on the allotment of shares allotted.</li> </ul> <p>======</p> <h5 id="164-under-subscription">1.6.4 Under Subscription</h5> <ul> <li>Under subscription is a situation where the number of shares applied for is less than the number for which applications have been invited.</li> <li>For example, if a company offers 2 lakh shares for subscription but receives applications for only 1,90,000 shares, it is a case of under subscription.</li> <li>In such a situation, the allotment will be confirmed for the 1,90,000 shares and entries will be made accordingly.</li> <li>However, it is essential to ensure that the company has received the minimum subscription.</li> <li>If the minimum subscription is not received, the company will have to refund the entire subscription amount received.</li> </ul> <p>======</p> <h5 id="165-issue-of-shares-at-a-premium">1.6.5 Issue of Shares at a Premium</h5> <ul> <li>Shares of financially strong companies are often issued at a premium, i.e., for more than the nominal or par value.</li> <li>The amount of premium is credited to a separate account called ‘Securities Premium Account’ and can be used for specific purposes such as issuing bonus shares, writing off preliminary expenses, paying premium on redemption of preference shares, etc.</li> <li>When shares are issued at a premium, the premium amount can be called with the application money, allotment money, or call money.</li> <li>The premium amount called with the application money is transferred to the Securities Premium Account when the application money is received.</li> <li>The premium amount called with the allotment money or call money is transferred to the Securities Premium Account when the allotment money or call money is received.</li> </ul> <p>(Note: The journal entries for the given illustration have not been provided as per the instructions.)</p> <p>======</p> <h5 id="166-issue-of-shares-at-a-discount">1.6.6 Issue of Shares at a Discount</h5> <ul> <li>Shares can be issued at a discount, which is less than the nominal or par value of shares.</li> <li>The difference between the nominal value and issue price represents the discount on the issue of shares.</li> <li>A company cannot ordinarily issue shares at a discount, with exceptions for reissue of forfeited shares and issue of sweat equity shares.</li> <li>An example of issuing shares at a discount would be a share with a nominal value of Rs. 100 being issued at Rs. 98, representing a 2% discount.</li> <li>The text mentions that the issue of forfeited shares will be discussed later, but no further information on this topic is provided in the text.</li> </ul> <p>======</p> <h5 id="167-issue-of-shares-for-consideration-other-than-cash">1.6.7 Issue of Shares for Consideration other than Cash</h5> <ul> <li>Shares can be issued for consideration other than cash, such as in the case of purchasing assets from vendors.</li> <li>The number of shares to be issued is calculated as Amount Payable / Issue Price.</li> <li>For example, if a building is purchased for Rs. 5,40,000 and the issue price is Rs. 100, the number of shares to be issued would be 5,400 at par.</li> <li>Private Placement of Shares is an offer of securities or invitation to subscribe securities to a select group of persons through issue of private placement offer letter as per Companies Act, 2013.</li> <li>Employees Stock Option Plan (ESOP) is a company’s offer to employees and employee directors to subscribe shares of the company at lower than its market value or fair value at a future date. It is a form of Sweat Equity.</li> </ul> <p>======</p> <h5 id="17-forfeiture-of-shares">1.7 Forfeiture of Shares</h5> <ul> <li>Forfeiture of shares involves cancelling the allotment and treating the amount already received as forfeited to the company.</li> <li>This is usually done when shareholders fail to pay call or allotment money.</li> <li>The journal entry for forfeiture of shares issued at par includes debiting Share Capital A/c by the called-up amount and crediting Share Forfeiture A/c by the paid-up amount.</li> <li>When shares are forfeited, all entries relating to the forfeited shares must be reversed except the entry relating to share premium received, if any.</li> <li>The balance of shares forfeited account is shown as an addition to the total paid-up capital of the company under the head ‘Share Capital’ in the balance sheet.</li> </ul> <p>Relevant illustrations and solutions provided in the text are examples of journal entries for specific cases of share forfeiture.</p> <p>======</p> <h5 id="171-reissue-of-forfeited-shares">1.7.1 Reissue of Forfeited Shares</h5> <ul> <li>The text is about several concepts in corporate finance and shareholding, including calls on shares, application money, buy-back of shares, and forfeiture of shares.</li> <li>A table is provided showing various transactions related to the issuance, allotment, and forfeiture of shares in a company, along with calculations for the amount of application money received and due, and the amount of excess application money.</li> <li>The concept of buy-back of shares is explained, including the sources from which a company can buy back its own shares, the procedures for doing so, and an illustration of how it works in practice.</li> <li>The text also includes a table showing the journal entries for a specific scenario involving the forfeiture and reissue of shares, as well as several questions and illustrations for the reader to work through on their own.</li> <li>Key terms used in the chapter include joint stock company, share capital, authorized capital, issued capital, subscribed capital, preference shares, non-redeemable preference shares, equity shares, and forfeiture of shares, among others.</li> </ul> <p>======</p>