ACCOUNTING FOR SHARE CAPITAL H.S. 2nd Year ACCOUNTANCY NOTES AHSEC ASSAM Higher Secondary PART-B UNIT -1



ACCOUNTANCY
B
UNIT -1

ACCOUNTING FOR SHARE CAPITAL


1. What is Company?
Ans: It is an association of persons who contribute funds or money’s worth to a common stock and uses it for a common purpose. It is created by law and affected by law. It is a legal person but with no physical existence.
According to Prof. Haney, "A company is an artificial person created by law, having separate entity with a perpetual succession and common seal".

2. What are the characteristics of a Company?
Ans: Followings are the characteristics of a company:-
(i) Voluntary Association: - It is a voluntary association of persons formed usually for profit.
(ii) Incorporation:  A company comes into existence the day it is incorporated or registered.
(iii) Separate Entity: A company, being a separate body can sue and be sued in its own name.
(iv) Common Seal: A company being an artificial person cannot sign for itself. A seal with the name of the company embossed on it act as a substitute for the company’s signature.
(v) Limited Liability: Liability of the members is limited to the extent of the face value of shares held by them.

3. What are the different kinds of companies?
Ans: Following are the different kinds of companies
A. On the basis of incorporation:
a. Chartered Companies
b. Statutory companies
c. Registered companies 

B. On the basis of liability:
a. Company limited by shares
b. Company limited by guarantee
c. Unlimited companies
C. On the basis of number of members:
a. Private company
b. Public company
D. On the basis of Domicile:
a. Foreign company
b. Indian company
E. Miscellaneous Company:
a. Government company
b. Holding and subsidiary companies

4. What are the differences between public and private company?
Ans: Following are the differences between public company and private company:
(i) Minimum number of members: Minimum number of members required to form a public company is seven where as in a private company it is only two.
(ii) Maximum number of members: There is no maximum limit on the members of a public company but in a private company maximum number of members is fifty.
(iii) Restriction on name: The name of a public company must end with the ward limited. But in the case of private company the ward private limited must be used at the end of the name.
(iv) Number of its directors: The public company must have at least three directors where as a private company must have at least two directors.
(v) Commencement of business: A public company can commence its business only after getting a certificate of commencement of business. But a private company can commence its business as soon as it is incorporated.

5. Mention five statutory and statistical books maintained by the company?
Ans: Statutory Books:
According to Section 88 of the Company’s Act 2013 every company shall keep and maintain the following registers:
(i) Register of debenture holders.
(ii) Index of members for each class of equity and preference shares held by each member residing in or outside India.
(iii) Register of any other security holders.
(iv) Books of account under sec 2(13) of the act.
(v) Register of charges under sec 85(1) of the Act.

Statistical Books:
In addition to statutory books some important statistical books are generally maintained by company:
(i) Share application and allotment book
(ii) Share call book
(iii) Register of share certificate
(iv) Share transfer certificate book
(v) Dividend book

6. What are shares? What are the different types of share?
Ans: The capital of a company can be divided into different units with definite value called shares. Holders of these shares are called shareholders.
There are two types of share:-
(i) Equity Share: Equity shares are those shares which are not preference shares. These shares do not enjoy any preferential rights. Equity shares will get dividend and repayment of capital after meeting the claims of preference shareholders. There will be no fixed rate of dividend to be paid to the equity shareholders and this rate may vary from year to year.
(ii) Preference Shares: Shares which enjoy the preferential rights as to dividend and repayment of capital in the event of winding up of the company over the equity shares are called Preference shares. The holder of preference shares will get a fixed rate of dividend.

7. What are the different types of Preference shares?
Ans: Following are the different types of Preference shares:
A. On the basis of Dividend Rights:
a. Cumulative Preference Share: They have the right to receive arrears of dividend before the dividend is paid to the equity shareholders.
b. Non-Cumulative Preference Share: They do not have the right to receive arrears of dividend before the dividend is paid to the equity shareholders.

B. On the Basis of Convertibility: 
a. Convertible preference share: They have the right to converted into equity shares.
b. Non-Convertible Preference Share: They do not have the right to converted into equity shares.

C. On the Basis of Refund of Capital:
a. Redeemable Preference Shares: Redeemable preference shares are those shares which are redeemable after the expiry of specific period of time.
b. Irredeemable Preference Shares: Irredeemable preference shares are those shares which are not redeemed by the company except in case of winding up of company.

D. On the basis of Participation:
a. Participating Preference Shares: They have the rights to participate in remaining profits after payment of dividends to the equity shareholders.
b. Non-Participating Preference Shares: They do not have the rights to participate in remaining profits after payment of dividends to the equity shareholders.

8. What are the difference between Preference share and Equity share?
Ans: Following are the difference between Preference share and Equity share:


9. What is Share Capital? What are the types or kinds or parts of Share Capital?
Ans: The amount required by the company for its business activities is raised by issue of shares, the amount so raised is called share capital of the company. The person who buys the shares of company is called shareholders.
Kinds or parts of capital:
(i) Authorised Capital: The amount of capital with which the company intends to be registered is called authorised capital.
(ii) Issued Capital: That part of authorised capital which is offered to the public for subscription is called issued capital.
(iii) Subscribed capital: Subscribed capital represents that part of issued capital which has actually been subscribed and allotted to the public.
(iv) Called Up Capital: The amount on the shares which is actually demanded by the company to be paid is known as called-up-capital.
(v) Paid up Capital: Paid up capital is that part of the called up share capital which has been paid by the shareholders.
(vi) Reserve Capital: Reserve capital is that portion of the subscribed capital which not been called up, and the company has, by special resolution, resolved that it can be called up only in the event of the winding up of the company.

10. What is Reserve capital and Capital reserve?
Ans: Reserve Capital:  Reserve capital is that portion of the subscribed capital which not been called up, and the company has, by special resolution, resolved that it can be called up only in the event of the winding up of the company.
Capital Reserve: Capital reserves are those reserves which are made out of capital profits. The capital profit is not earned by company in normal course of business. It can be used to write off capital losses.

11. What are the difference between Reserve capital and Capital reserve?
Ans: Following are the difference between Reserve capital and Capital reserve:

Short Note:
A. Calls in Arrears: Sometimes some shareholders do not pay their dues on allotment and or on calls within the fixed period of time. The amount which is not paid by shareholders is called calls-in-arrears. The company can charge interest @ 10% p.a. for the period for which such amount remained in arrear from the shareholders.
B. Calls-in-Advance: Sometimes some shareholder may pay a portion or whole of the amount due in shares before the amount is called up. Such amount paid in advance against call is known as calls-in-advance. A company pay interest on such amount received in advance @ 12% p.a. Interest on calls-in-advance is a liability against the profits of the company.
C. Minimum Subscription: Minimum subscription means the minimum amount that in the opinion of the directors must be raised to meet the needs of business operations of the company relating to:
  1. The price of any property purchased, or to be purchased, which has to be met wholly or partly   out of the proceeds of issue.
  2. Preliminary expenses payable by the company and any commission payable in connection with  the issue of share;
  3.  the repayment of money borrowed by the company for the above two matters;
  4. Working capital; and
  5. any other expenditure required for the usual conduct of business operations.


It is to be noted that minimum subscription of capital cannot be less than 90% of the issued amount according to SEBI guidelines.

D. Under- Subscription: When a company receives application less than the shares company has offered for subscription than it is called under-subscription of shares. For example if a company invites application for 10000 shares and applications are received from public for 8000 shares, the issue is said to be under-subscribed.
E. Over-Subscription: When company receives application more than the shares company has offered for subscription then it is called over-subscription. For example if a company invites application for 10000 shares and applications are received from public for 12000 shares then the issue is said to be over-subscribed.
F. Right Share: Issue of shares by an existing company to existing shareholders are known as right issues. Such further shares shall be offered to the person who on that date are the holders of equity shares of the company proportionately to their equity holdings on that date.
G. Pro-rata Allotment: When the number of shares applied is more than the number of shares issued by a company, the issue of share is said to be oversubscribed. The company cannot allot shares more than those offered for subscription. In such a case shares are allotted in proportion of shares issued to shares applied, than such an allotment is called pro-rata allotment.

12. Discuss share issue at par, discount and at a premium?
Ans: A company may issue shares at par, at premium and at a discount.
At Par: Issue of shares at par means issue of share at face value. For e.g.,  if the face value of a share is Rs. 100 and same is issued at Rs. 100, it means that the shares have been issued at par.
At Premium: Issue of shares at a premium means issue of shares at a price higher than its face value. For e.g., if the face value of a share is Rs. 100 and the same is issued at Rs. 110, it means that the shares have been issued at a premium.
At Discount: Issue of shares at a discount means issue of shares at a price lower than its face value. For e.g.,  if the face value of a share is Rs. 100 and the same is issued at Rs. 90, it means that the shares have been issued at a discount.

13. What do mean by preliminary expenses? Mention the items which are usually included in the list preliminary expenses?
Ans: Preliminary expenses are those expenses which are necessarily incurred in connection with the formation of a company. These expenses are also known as promotion, floatation or foundation expenses. Preliminary expenses may be written off against securities premium account.
Preliminary expenses include:  
a. Cost of drafting, printing and issuing prospectus.
b. Cost of preliminary books and common seal.
c. Cost of drafting and printing different documents for registration of a company.
d. Stamp duty on authorised capital.
e. Underwriting commission payable.

14. What are the utilities of securities premium reserve?
Ans: Following are the utilities of securities premium reserve: 
(i) For issue fully paid bonus shares to the members of the company.
(ii) For writing off preliminary expense of the company.
(iii) For writing off the expenses of the commission paid or discount allowed on issue of shares or     debenture of the company.
(iv) For providing premium payable on the redemption of redeemable preference shares or debenture of the company.
(v) For purchase of its own shares.

15. What is Forfeiture of Shares?
Ans: Forfeiture of shares means when a shareholder fail to pay calls on the day fixed for payment thereof and fails to pay even after his attention is drawn to it by registered notice, the Board of directors pass a resolution to the effect that such shares be forfeited. Forfeiture of shares brings about compulsory termination of membership and the company takes the shares from the defaulting member by way of penalty of allotment and /or call money.

16. State the procedure for forfeiture of share?
Ans: A company must follow the following procedure for forfeiture of share:
Notice before Forfeiture: When a shareholder fails to pay any calls, the company may forfeit the shares. Before the shares can be forfeited the company may serve a notice on the defaulting member requiring payment of the call. The notice must give not less than fourteen days time from the date of service of notice for the payment of the amount due. The notice must also state that in the event of non-payment of the amount due within the period mentioned in the notice the shares in respect of which call was made will be liable to forfeit.
Non-compliance of Notice: If the shareholder fails to comply with the requirement of this notice, the directors may pass a resolution effecting the forfeiture of shares.
Effect of Forfeiture: The effect of forfeiture of shares is that the defaulting shareholder losses all his rights in shares and ceases to be a member. The name of shareholder is removed from the register of members and the amount already paid by him is forfeited.

17. What is Re-issue of forfeited shares?
Ans:  As per clause 31(1) of the table ‘F’ to the companies Act, 2012, forfeited share may be sold or otherwise disposed off on such manner as the board thinks fit.
Clause 32(1) of the table ‘F’ gives absolute power to the board of directors regarding the reissue of forfeited shares. They have the right to reissue either whole or part of the shares forfeited. They have the authority to fix the terms and price of reissue of such shares. Hence, they can re-issue the forfeited shares at par or at a premium or at a discount.

18. What is Sweat equity share?
Ans: Section 54 of the Companies Act allows a company to issue a new type of equity shares called sweat equity shares. Such shares means equity shares issued at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions by whatever name called.

19. Discuss the process for allotment of shares of a company in case of over subscription.
Ans: Rules regarding over subscription according to SEBI guidelines:
All applicants should be categorised according to number of shares applied for.  For e.g. different categories may be set for applicants of 100, 500, 1000 shares and so on.
Allotment shall be made in marketable lots on a proportionate basis.
Where the issue is over subscribed, in the process of allotment, the following situations may arise in course of accounting treatment:
a. Total rejection of some applicants and full allotment to remaining applicants.
b. Pro-rata allotment among all the applicants.
c. Refusing allotment to some applicants and making Pro-rata allotment among the remaining applicants.

20. What are the difference between share and stock?
Ans: Following are the differences between share and stock:
a. Payment: Stocks are always fully paid up where as shares may or may not be fully paid up.
b. Issue: Shares may be issued when a company is incorporated but stock cannot be issued under such circumstances.
c. Numbering: Stocks are not numbered, whereas shares are serially numbered.
d. Denomination: Shares are generally of equal denomination but stocks may be of unequal amount.
e. Registration: Shares are always registered and not transferable by mere delivery but stock may be registered or unregistered and unregistered stock can be transferred by mere delivery.

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