Introduction

Financial statement analysis is the process of analyzing financial statement of a company of a company so as to obtain meaningful information about its survival,
stability, profitability, solvency and growth prospects. The financial statement analysis can be performed by using a number of techniques such as comparative
statements, common size statements and ratio analysis. Ratio analysis is the more popularly and widely used technique of financial statement analysis.
 
Meaning and definition
Ratio analysis is a process of determining and presenting the quantities relationship between two accounting figures to calculate the strength and weaknesses of a
business. In simple word, ratio analysis is quotient of two numerical variables which shows the relationship between the two figures, accordingly, accounting ratio
us a relationship between two numerical variable obtains from financial statements such as income statement and the balance sheet. Accounting ratio are used as
an important tool of analysing the financial performance of the company over the years ans as comparative position among other companies in the industry.
In other words, ratio analysis is the process of determining and interpreting numerical relationship between figures of financial statement.
According to Kennedy and McMullan, the relationship of one term to another expressed in simple mathematical form is known as ratio.
% of profit = ProfitCapitalProfitCapital * 100
Ratio can be expressed in the following terms:
Ratio method: This method shows the relationship between two figures in ratio or proportion. It is expressed by simple division of one item by another i.e 2:8:1,
0:8:1 and so on.
Rate method: This method shows relationship in rate or times, like 4 times or 5 times and so on.
Precentage method: The relationship between two figures can be presented in percentage like 20%, 30% and so on.
 
IMPORTANCE AND ADVANTAGES OF RATIO ANALYSIS
Ratio analysis is an important tool for analysising the company’s financial performance. The following are the important advantages of the accounting ratios.
Analysing financial statement: Ratio analysis an important technique of financial statement analysis. Accounting ratios are useful for understanding the financial
position of the company. Different users such as investors, management, bankers and creditors use the ratios to analyse the financial statement of the company
for their decision making purpose.
Judging efficiency: Accounting ratios are important for judging the company's efficiency in terms of its operations and management. They help judge how well
the company has been able to utilize its assets and earn profits.
Locating weakness: Accounting ratios can also be used in locating weakness of the company's operations even though its overall performance may be quite
good. Management can then pay attention to the weaknesses and take remedial measures to overcome them.
Formulating plans: Although accounting ratios are used to analyze the company's past financial performance, they can also be used to establish future trends of
its financial performance. As a result, they help formulate the company's future plans.
Comparing performance: It is essential for a company to know how well it is performing over the years and as compared to the other firms of the similar nature.
Besides, it is also important to know how well its different divisions are performing among themselves indifferent years.
Inter-intra firm comparison: A firm may like to compare its performance with that of other firms and of industry in general. The comparison is called 'inter-firm
comparison'. If the performance of different units belonging to the same firm is to be compared, then it is called 'intra-firm comparison'. Such comparison is almost
impossible without proper accounting ratios.
 
Classification of ratios
Accounting ratio can be classified from different point of view. Ratio may be used to evaluate the company’s liquidity, efficiency, leverage, profitability. The ratio
may be classified as following;
Liquidity ratio: Liquidity represents one's ability to pay its current obligations or short-term debts within a period less then a year. Liquidity ratios, therefore,
measure a a company's liquidity positions. The ratios are important from the viewpoint of its creditors as well as management. The liquidity position of the
company can be measured mainly by using two liquidity such as follows:
a)Current ratio
b)Quick ratio
Current ratio
Current ratio is also known as short-term solvency ratio or working capital ratio. This ratio is used to assets the short-term financial position of the business. In
other words, it is an indicator of the firm's ability to meet its short-term obligations;
it is calculated by;
Current ratio = CurrentassetsCurrentliabilitiesCurrentassetsCurrentliabilities
 
Quick ratio
Quick ratio is another measure of a company's liquidity. It is also known as liquid ratio or acid test ratio. However, although it is used to test the short-term solvency
or liquidity position of the firm, it is a more stringent measure of liquidity than the current ratio. This ratio is calculated by dividing liquid assets by current liabilities.
liquid assets asset cash and other assets which ate either equivalent to cash or convertible into cash within a very short period of time. Thus liquid assets are also
called monetary current assets.
Quick ratio = LiquidassetscurrentliabilitiesLiquidassetscurrentliabilities
 
Fixed assets Turnover ratio
Fixed assets turnover ratio is termed as the ratio of sales to fixed assets. Fixed turnover ratio indicates how efficiently the fixed assets are used. It measures the
efficiency with which the firm has been its fixed assets to generate sales.
Fixed assets turnover  ratio= SalesNetfixedassetsSalesNetfixedassets
 
Total fixed turnover ratio
The ratio shows the relationship between total assets and sales. Total assets turnover ratio indicates how well the firm's total assets are being used to generate its
sales.
Total assets turnover ratio = NetsalesTotalassetsNetsalesTotalassets
 
Capital employed turnover ratio
Capital employed turnover ratio establishes the relationship between the amount of sales ad capital employed, it shown how efficiently capital employed in the
company has been utilized in generating sales revenue.
Capital employed turnover ratio = SalesCapitalemployedSalesCapitalemployed
 
Leverage ratios
Leverage ratios are also called long-term solvency ratios or capital structure ratios. The term solvency implies the ability of a company to meet the payments
associated with its long-term debts. Thus, solvency ratios are the measure of the company's ability to meet its long-term obligations. Generally, these ratios are
expressed in proportions.
The following are the major types of leverage ratios:
a)Debt-equity ratio
b)Debt to total capital ratio
 
Debt-equity ratio
The debt-equity ratio is calculated to ascertain the soundness of the company's long-term financial position. It indicates the extent to which it depends upon
borrowed funds for its existence. It portrays the proportion if its total funds acquired by way of external financing.
Debt-equity ratio = Long−termdebtShareholdersfundLong−termdebtShareholdersfund
Alternatively,
Debt-equity ratio =  TotaldebtTotalshareholdersfundTotaldebtTotalshareholdersfund
Long-term debt: The debt which is payable after current year is called long term-debt. Long-term debt refers to borrowed funds. Long-term debts include term
loans, debentures, bonds, mortgage loans and secured loans.
Total debt: it includes both short-term debt as well as long-term debt. Short-term debts are the current liablilities.
 
Shareholder's fund: Shareholders fund is also called as net worth or shareholders' equity. Shareholders fund is the amount, which belongs to the company's
shareholders or owners. It includes equity share capital, preference share capital, reserve and surplus, accumulated profits, reserve funds, general reserves,
capital reserve, share premium, share forfeiture, retained earnings, reserve for contingency, sinking fund for renewal of fixed  assets and fixed assets and
redemption of debenture. The fictitious assets such as preliminary expenses, underwriting commissions, discount on issue of shares, or debentures are deducted
while determining shareholders' fund.
 
Turnover ratios
Turnover ratios are also known as activity or efficiency ratios. The total funds raised by the company are invested in acquiring various assets for its operations.
The assets are acquired to generate the sales revenue and the position of profit depends upon the value of sales. These ratios establish the relationship sale with
various assets. Ratio and express in integrates or times rather then percentage or proportion. The turnover ratios are mostly computed to measure the efficiency.
The following are the types of turnover ratio;
 
Inventory turnover ratio
This ratio is also called stock turnover ratio. This ratio shows the relationship between the cost of goods sold and the average inventory. This ratio measures how
frequently the company's inventory turn into sales. It, therefore, shows the efficiency with which the company's inventory has been converted into sales.
It is calculated by,
Inventory turnover ratio =  SalesClosinginventorySalesClosinginventory  
 
Debtor  turnover ratio     
It is also termed as receivable turnover ratio. This ratio establishes the relationship between net credit sales and average debtor for the year. It shows how quickly
the credit (debtor or receivables) of the company has been converted into cash. This ratio is calculated by using the following formula
Debtor turnover ratio= NetcreditsalesAverageaccountreceivableNetcreditsalesAverageaccountreceivable
 
Average collection period           
It is also called debt collection period or average age of debtors and receivables.it indicates how long it takes to realize the credit sales. It also measures the
average creditor period enjoyed by the customers. It indicates the average time lag between credit sales and their conversion into cash.
 
Profitability ratios
The main objective of a company is to earn profit is both a means and an end to the company. Therefore, profitability shows the overall efficiency of the company.
Profitability ratios are the measure of its overall efficiency. Generally, profitability ratio can be calculated in term of the company's sales, investments, and earning
and dividends. The following are the main types of profitability ratios:
1. Profitability in relation to sales
Gross profit margin
Net profit margin
 
2. Profitability in relation to investment
Return on assets
Return on shareholder equity
Return on shareholder find
Return on capital employed
 
3. Profitability in terms of earning and dividend
Earning per share
Dividend per share
 
Gross profit ratio
Gross profit ratio is also termed as gross profit margin. This ratio shows the relationship between gross profit and net sales and it measures the overall profitability
of the company in terms of sales. It is generally expressed in percentage.
It is calculated by,
Gross profit = GrossprofitNetSalesGrossprofitNetSales * 100  
 
Net profit ratio
This ratio is also called net profit margin. This ratio measures the overall profitability of a business by establishing the relationship between net profit and net sales.
This ratio is calculated by dividing net profit tax by net sales and multiplying by 100.
 
Return of assets
This ratio measure the relationship between the total assets and net profit after tax plus interest. It measures the productivity of the assets and determines how
effectively the total assets have been used by the company.
Return of assets =Netprofitaftertax+InterestTotalassetsNetprofitaftertax+InterestTotalassets
 
Return on shareholders' equity
This ratio expresses the profitability of a business in relation to the owners fund.
It is calculated by,
Return on shareholders' equity =   NetprofitaftertaxTotalshareholder′sequityNetprofitaftertaxTotalshareholder′sequity * 100
 
Return on capital employed
The net result of operation of a business is either profit or loss. The funds used by the company to generate profit consist of both properties fund and borrowed
funds. Therefore, the company's overall performance can be judged in terms of capital employed.
Return on capital employed = Netprofitaftertax+InterestCapitalEmployedNetprofitaftertax+InterestCapitalEmployed * 100
 
Earning per share
Earning per share measures the profit available to equity shareholder on per share basis. This ratio express the earning power of the company in terms of a share
held by the equity shareholders. This ratio computed by dividing the net profits after preference dividend by the number of equity shares outstanding.
Earning per share = Netprofitaftertax−PreferencedividendNo.ofequitysharesoutstandingNetprofitaftertax−PreferencedividendNo.ofequitysharesoutstanding
 
Dividend per share
The profits earned by the company finally belong to the equity shareholder. Therefore,  all or some of them are distributed to them which are known as dividends.
This ratio shows how much share of stock held by them is paid out as dividend. The amount of earning distributed and paid as cash dividend is considered for
calculating the dividend per share.
Dividend per share = DividendavailabletoshareholdersNo.ofequityshareoutstanding

Company Accounts: Company And Its

Formation
Share 43
Company:
Company is an artificial person created by law to carry on a business for the profit with distinct legal existence. The company has transferable shares, limited
liabilities, perpetual succession & a common seal. The company is managed by the representatives of shareholders called board of directors. In other words
“company is a voluntary association of individuals for profit having capital divided into transferable shares the ownership   is the condition of membership”.
According to Nepal Company Act 2053 “A Company refers to any company formed and registered under this act”.
 
Characteristics of a company:
The main characteristics of a company are as follows:
Legal personality: A company is an artificial person, which is created by law. It exists only incontemplation of law and, therefore, has no physical shape or form.
Although invisible and intangible, as a legal person, it enjoys almost all the rights of a natural person. It has the rights to enter into contracts and it can buy and sell
the properties in its own name. It can be sue and can be sued.
Perpetual existence: Being an independent body, the life of the company is not connected with the life of its shareholders. The law creates the company and the
law brings it to an end. It is a corporate body. Its shareholders may transfer their shares and new persons may come in their place but the existence of the
company is not affected.
Limited liability: The limited liability is another important features of a company. If anything goes wrong with the company, the shareholder’s liability is limited by
the amount of the shares held by him. In other words, other than the money one has invested, one cannot be called upon to pay even a single paisa more out of
one’s pocket in order to meet the company’s obligations.
Democratic management: A company is a democratic organization. The decisions are taken in the annual general meeting and the board meeting by following
the principles of democracy. The board is elected and dismissed according to the interest of the majority of shareholders.
Transferability of shares: The shares of a company are transferable except in the case of private limited companies. The shares, especially of a public limited
company, are easily transferable form one person to another without prior permission of the company management. A shareholder can convert his shares into
cash easily either by selling or transferring the shares to other persons. This transfer of shares changes the ownership but does not affect the regular functioning
of the company.
Common seal: As the company has no physical form, it cannot sign any contract in its name. Therefore, originally, all documents and contract papers require the
affixing of the seal. Most of the transactions are signed by the directors who act as agents of the company. It uses a common seal for its official signature.
Therefore, any document without common seal of the company is not taken into consideration and the company is not liable for the same.
 
Types of company:
The various types of companies based on their nature are as follows:
Company promoters:
Company promoters are the people who give birth to a company. Promoters generate the idea and discover business opportunities. They make detailed
investigation about the feasibility of the business, financial sources and competitors. They prepare necessary document like the Memorandum of Association,   the
Article of Association and the prospectus for the incorporation of the company. The promoters may be anybody such as an entrepreneur, a professional promoter,
government and financial institutions. The main functions of promoters are as follows:
To develop the idea of starting a business.
To investigate and verify the feasibility of the business.
To select the name and the site of the business.
To determine the objectives of the business.
To prepare necessary documents for its registration.
To make the plan of financial sources.
Main documents of a company:
Some important documents are required and prepare to submit to the office of company register in the process of formation of a company. Some of these
important documents are as follows:
#In case of private limited company:
i)Memorandum of Association
ii)Article of Association
#In case of public limited company:
i)Memorandum of Association
ii)Article of Association
iii)Prospectus
 
Article of Association:
Article of Association is another important document for establishment of the company. It relates with the internal rules and regulations of the company. It contains
rules, regulations and by laws for the internal management of the company. Every company has to prepare articles of association along with other documents for
incorporations. Matters related in the Article of Association should not be against the Memorandum of Association. Any content of Article of Association which
disagree with the Memorandum of Association shall be invalid to the extent of such conflict. It shows the relation between the company and its member and
relation among the members.
 
According to the Company Act 2053, the Articles of Association contains the following:
Number of directors and their terms and conditions.
The amount of minimum subscription by directors.
Matters relating to the procedure of calling company’s meeting and notice to be given for meeting.
Director’s remuneration and allowance.
Rights and duties of the managing directors.
Provisions relating to the rules and regulations of internal management.
Other necessary particulars.
 
Memorandum of Association:
 Memorandum of Association is the first document in which the main objective and external rules and regulations of the company will be stated. It is the
constitution of a company. The company should operates as per the terms and conditions mentioned in the MOA. If the company does not operate as per the
MOA, it will be considered as illegal. In case of private limited company, at least , one promoter and in case of public limited company at least seven promoters
have to sign on the MOA.
According to Lord Macmillan “The Memorandum of Association sets out the constitution of the company. It is, so to speak the charter of the company and
providers the foundation on which the structure of the company is built.”
 
The main contents of the Memorandum of Association are as follows:
The name of the company.
The name of the place where the company’s registered office is situated.
The objectives of the company.
The liability clause of shareholders.
The amount of capital of the company.
Other necessary particulars.
 
Prospectus:
Prospectus is another major important document of the company. Simply, prospectus is the brief report of the company. In other words, Prospectus is an invitation
to the general public to participate or purchase the shares of the company. We know that public limited company will manage the capital from the general public by
issuing the shares. The prospectus should not be signed by the all the directors, but the prospectus which is to be published should be approved by the concerned
department of Government of Nepal.
 
The main objectives of Prospectus are as follows:
Information about the company to the general public.
Initiation of interest from the public for investment by purchasing shares.
Creation of confidence towards company to the general public.
Make the general public aware about the terms and conditions for purchasing shares.

Company Accounts: Method of Raising

Capital
Share 14
Share capital:
The capital of the company is divided into different parts called shares. Each part of the share capital is called a share. The value, which is stated in share
certificate, is called par value/face value/nominal value/stated value. Total amount of all the shares is called share capital. The shares are divided into definite
value and numbers. Holders of these shares are called ‘shareholder’ or ‘member’ of the company. It is an amount invested by the shareholders towards the
nominal value of shares.
In other word “share capital is the ownership capital of a company raised by the issue of its shares. It is an amount invested by the shareholders towards the
nominal value of shares. A company needs share capital in order to finance its activities.
 
There are different types of share capital, which are as follows:
Authorized or registered capital:
The capital which is mentioned in the Memorandum of Association as the maximum amount of share capital is called authorized or registered capital. It is the
maximum amount of capital which a company can raise. The capital is divided into definite number of shares. For example, if a company has 20,000 authorized
shares at the rate of Rs. 100 each, the total authorized share capital will be Rs. 2,000,000. The authorized capital is also known as nominal capital.
Issued capital:
It is the part of the authorized capital, which is actually offered to the public for subscription. Generally, a company does not issue the entire authorized shares at a
time so that the issued capital is always less than the authorized capital.(50,000 shares @ Rs.100 each).
Subscribed capital:
It is that part of the issued capital, which is actually taken up by the investors. For example, if a company issues 50,000 shares @ Rs. 100 each and the
application for 45,000 shares were received, the subscribed capital is Rs.45,00,000.
Called-up capital:
The amount of share capital due on shares is normally collected from the shareholders in instalments at different intervals. The called-up capital is that part of the
nominal values of shares subscribed by shareholders, which is requested by the company for payment. The uncalled capital if retained by the company to be
called up for the payment of creditors on liquidation is treated as reserve capital.
Paid-up capital:
It is the part of called-up capital, which has been actually received from the company’s shareholders. If the called-up capital is 45,000 shares @Rs. 80 each and a
shareholder holding 100 shares fails to pay the second instalment of Rs. 20 per share, the paid-up capital is Rs. 35,98,000 since Rs.2000 due on 100 shares at
Rs. 20 per share failed to pay.
 
Meaning of share:
A share is a document that acknowledges the ownership of a company to the limit of the amount contributed. So, the share is defined as an interest in the
company reflecting the ownership thereof and entitling to receive profit proportionately. The share capital of a company is divided into fixed number of units, and
each such unit is called share. Therefore, a share can be defined as a unit of share capital reflecting the extent of interest of a shareholder.
 
Types of shares:
1) Equity shares:
Equity shares are those, which will get dividend and refund of capital only after preferenceshareholders are paid. Equity shares are also known as ordinary shares
or common shares. There is no fixed rate of equity dividend. The dividend on these shares is paid from profits only after paying interest on debentures and
dividends on preference share capital.  Equity shareholders can participate in management and enjoy the voting rights to elect some members of Board of
Directors. Equity shareholders are the real owner of the business.
 
The importance of equity share capital are as follows:
i)Importance to the company
 No need to pay dividend, in case of loss of the company
No need to refund to the equity shareholders before winding-up of the company
The directors are elected from the equity shareholders for the effective management of the company
ii)Importance to the shareholders
Every shareholder has a voting right to elect the company’s BOD.
Equity shareholders can enjoy a higher  amount of dividend in case of a higher profit.
Equity  shareholders can easily sell or transfer their shares to others.
 
2)Right shares:
The shares entitling to be subscribed by the existing shareholders of the company are called right shares. These are additional equity or common shares offered
by a company of its shareholders to subscribe within a specified period at a specific price.
 
3)Preference shares:
Preference shares are those shares that are entitled to certain privileges. The dividend on preference share is paid   at a fixed rate. The dividend on such shares is
paid before any dividend is paid to equity shareholders. Similarly, at the time of winding-up the company, the preference capital is repaid before such a repayment
is made to the equity shareholders. Preference shareholders do not have any voting rights.
 
Types of preference shares are as follows:
Cumulative preference share:
Cumulative preference shares are those shares on which the amount of unpaid dividends is accumulated and is carried forward as a liability.
Non-cumulative preference share:
They are those shares on which the arrears of dividend do not accumulate.
Redeemable preference share:
They are those shares that can be redeemed within a specific period of time. The terms and conditions for redemption of preference shares need to be specified at
the time of the issue of shares.
Irredeemable preference share:
They are those, which can be redeemed only at the time of liquidation of the company.
Convertible preference share:
they are those shares, which can be converted into equity shares. The conversion becomes possible when the company provides such option.
Non-convertible preference share:
They are those shares, which can not be converted into equity shares. Preference share are non-convertible unless otherwise stated.
Participating preference share:
They are those shares, which have the right to participate in any surplus profit of the company after paying dividend on equity shareholder.
Non-participating preference share:
They are those share, which do not carry such rights. If the Article of Association of the company is silent, preference shares are assumed to be non-participating
preference share.
 

Equity share Preference share

Dividend on equity share Dividend on preference
is paid after the payment share is paid before the
of preference dividend. payment of equity share.
Rate of dividend on
Rate of dividend on
equity share may vary
preference share is fixed.
from year to year.
Arrears of dividend may
Arrears of dividend
be accumulated in case of
cannot be accumulated in
cumulative preference
any case.
share.
In case of dissolution of In case of dissolution of
the company, equity share the company, preference
capital is refunded after share is refunded before
the repayment of the repayment of equity
preference share capital. share capital.
It can not be convertible. It may be convertible.
Equity shareholder enjoy Preference shareholders
voting rights. do not have voting rights.
 
 
4)Deferred share:
The share allotted to the promoters as a token of reward for the company is called deferred shares. Founders or management shares are the other terms which
are used to refers such shares.
Deffered shares enjoy rights to share on profit after paying off preference dividend and equity dividend.
 
Issue of shares:
A company issues its shares to the general public through an invitation called prospectus. It issue shares to the public through the prospectus to meet present
requirement of the fund. The prospectus of the company includes details about the company indicating authorized capital, the number of shares issued and the
face value of share. Company can issue its share either for cash or for other than cash. However, sometimes shares are also issued for consideration other than
cash, such as for the purchase of assets and for the purchase of business.
 
Issue of shares for cash:
The shares of a company can be issued either at par or at discount or at premium. The amount of shares can be collected either on lump-sum or on installment
basis.
Issue of shares on Lump-sum Basis:
If the whole amount of share is collected at once, it is called issue of share on lump-sum basis.
Issue of share at par: A share issued at a price equal to its face or nominal value is called issue of share at par. For instance, if a share of Rs. 100 each is issued
at Rs. 100, it is known as issue of share at par.
Issue of shares at Discount: A share issued at a price lower then its face or nominal value is called issue of share at discount. For instance, if a share of Rs.100
each is issued at Rs.90, it is issue of share at discount.
Issue of share at premium: A share issued at a price greater than its face or nominal value is called issue of share at premium. For instance, if a share of Rs.100
each is issued at Rs.110, it is issue of share at premium.
 
Issue of shares on instalment Basis:
The amount of shares may be collected in different instalments. Generally, such amount of instalments is collected in the form of application, allotment, first call
and second and final call.
Share application: A prospective subscriber intending to purchase the share pays first instalment of the amount of share with an application form. The amount of
first instalment paid is called share application.
Share allotment:  The Company allots the shares among different applicants after receiving their share application money. The allotment of shares implies that
the company has accepted the application of the subscribers and decided to give shares to them. The company sends letters to the applicants intending for
subscribing the shares, which is called ‘letter of Allotment’.
Calls on shares: The remaining amount of the shares allotted is called up by writing letters to the shareholders, which is known as calls on share. Such remaining
amount is called up after receiving the allotment money.
 
Calls in Arrears:
 When a shareholders fails to pay the due amount of share allotment or calls, the unpaid amount of share is called ‘calls in arrears’. In other words, any instalment
money (either allotments or calls or both) called up by the company but not paid by the shareholder within the specified time is called “calls in arrears.”
There are two alternative methods of accounting treatment for calls in arrears they are as follows:
i) showing calls in arrears account:  Under it, the amount of unpaid share amount is shown in calls in arrears account.
ii) without showing calls in arrears account:  Under it, the amount of unpaid share amount is not shown in calls in arrears account. The debit balance remaining
in share allotment and calls account represents the amount of calls in arrears.
 
Interest on Calls in Arrears:
A company needs to receive interest on calls in arrears from those shareholders who fail to pay share called money within the specified period of time. The interest
on calls in arrears is charged as per the provision of Article of Association.
 
Calls in advance:
The company receives the amount of share in different instalments. Sometimes, the company may receive the uncalled amount of instalments in advance as well.
The amount of instalments, which have not been called up but received, is known as calls in advance. Calls in advance are liability and it is shown in liability and it
is shown in liability side of balance sheet. At the time of journal entry, bank account will be debited and calls in advance account will be credited.
 
Minimum subscription:
It refers to the amount, which must be raised to meet the requirement of operation of the business. According to Nepal Company Act 2053, a company must
receive subscription at least 50 per cent of its issued capital as minimum subscription. Minimum amount required for:
Acquiring properties for the company
To pay preliminary expenses and commission
Payment of money borrowed by the company
To meet required working capital
To pay other expenditures
 
Under subscription:
Sometimes, the shares offered by the company may not be subscribed fully by the public. If the shares subscribed are less than the shares offered, it is called
under subscription.
 
Over subscription:
The condition where the share application received is more than the number of shares offered by the company then it is called over subscription of shares. For
example, a company has issued 20,000 shares but it has received application for 30,000 shares in such condition it is called over subscription. In such case, the
company cannot allot shares to all the applicants in full.
 
The allotment of the shares in case of over subscription can be made under the following alternatives:
Full rejection of excess application: under this alternative, the excess applications of shares received for the shares offered by the company are rejected. The
rejected applications money is refunded along with a letter of regret.

Pro-rata allotment: Under this alternative, the company allots the shares to all the applicants proportionately. For example, if 5,000 applications were received for
1,000 shares issued, the pro-rata allotment would be 5000:1000 or 5:1. In this instance, an applicant who has applied for 5 shares is lloted only one share. The
excess application money is utilized towards the amount due on allotment and subsequent. It is a process of allotment of shares on proportionate basis.

Mixed method: Under this alternative, some applicants are fully allotted, some are allotted proportionately and some are rejected. The application money should
be refunded to the applicants to whom no shares are allotted. The excess of application money on proportionately allotted shares may be utilized towards the
allotment and subsequent calls.
 
Issue of shares for Non-cash consideration:
The issue of shares for consideration rather than cash is called ‘issue of shares for non-cash consideration.’ A company may issue shares for purchasing assets
and other business. It may also issue shares for paying underwriting commission and remuneration its promoters. 
 
Share underwriting:
Underwriter is a person or a company who undertakes for issuing the shares or debentures at a nominal commission. Share underwriting is an agreement
between the company and underwriter under which the underwriter under takes for an agreed commission for whole or part of the shares and guarantees to sale
the shares of the company.
 
Underwriting commission:
Underwriting commission is a commission paid by a company to any person or financial institutions who guarantees to take up any shares or debentures offered
by the company to the public for which the application is not received.
Brokerage:  Share broker is an agent acting for the company in issuing shares. Brokerage is a commission changed by the broker for completing any negotiations.
A share broker charges commission for rendering services in the issue of shares and debentures of a company.
 
 
Accounting treatment of Goodwill and Capital Reserve:
Sometimes, the amount of purchase consideration of a business purchased differs with its net worth. If the amount of purchase consideration is more than the net
worth then goodwill is debited with the excess of purchase consideration over the net worth.
 
Opening balance sheet:
The balance sheet prepared by newly established company after the issue of shares and debentures is called opening balance sheet. In other word, the balance
sheet of the existing company prepared after the issue of shares and debentures, purchase of assets, purchase of business and reconstruction of financial
structure is known as opening balance sheet.
 
Issue of shares to promoters: Promoters are those individuals or organizations who give birth to the company. The following entry is passed for the issue of
shares:
Goodwill a/c        Dr
        To share capital a/c
(Being issue of…shares of Rs….each to promoters for their services)
Forfeiture of shares:
The term “forfeiture of shares” indicates to the cancellation of shares. This happens when a shareholder fails to pay allotment or call or both within the specified
date. The Board of Directors are empowered by the company’s articles of association to forfeit the default shares. Before the forfeiture of shares, the company
must follow the procedure for collecting calls in arrear as amount as stand in article of association and prevailing act.
Forfeiture of shares is a process of withdrawing the shares allotted and seizing the amount already paid by the defaulters.
 
The conditions of forfeiture of shares are as follows:
Forfeiture of shares at par:
The following journal entry is passed for the Forfeiture of shares initially issued at par
 
 

Date particulars LF Dr.Amt Cr.Amt

Share capitals
a/c……………………..Dr.
 
       The share allotment a/c
       The share first and final XXXXX
    XXXXX
call a/c XXXXX
       The share forfeiture a/c XXXXX
(Being forfeiture adjusted)
 
 
 Forfeiture of shares at discount:
The following journal entry is passed for the Forfeiture of shares initially issued at discount:

Date Particulars LF Dr.Amt Cr.Amt

Share capitals
a/c……………………..Dr.  
      The discount on issue of XXXXX
  share a/c   XXXXX
XXXXX
       The calls in arrear a/c
       The share forfeiture a/c XXXXX
   (Being forfeiture adjusted)
 

 
 Forfeiture of shares at premium
i)When a shareholder fails to pay the amount of premium:
The following journal entry is passed for the When a shareholder fails to pay the amount of premium;

Date particulars LF Dr.Amt Cr.Amt

Share capitals
a/c……………………..Dr.
 
Share premium
a/c…………………..Dr. XXXXX  
   
       The calls in arrear a/c XXXXX XXXXX
       The share forfeiture a/c XXXXX
(Being forfeiture adjusted)
 
ii) When a shareholder pay the amount of premium:
The following journal entry is passed for the When a shareholder pay the amount of premium;

Date particulars LF Dr.Amt Cr.Amt

Share capitals
a/c……………………..Dr.
 
       The calls in arrear a/c XXXXX
    XXXXX
       The share forfeiture a/c  
(Being forfeiture adjusted) XXXXX
 
 
Reissued of forfeiture shares:
The following journal entry is passed for the Reissued of forfeiture shares;
              
Bank a/c ……………………………………….Dr.
Share forfeiture a/c………………………Dr.
           To share capital a/c
(Being……shares reissued at Rs….each)
 The following journal entry is passed for transferring the amount of net gain on capital reserve account;
Share forfeiture a/c…………………..Dr.
          To capital reserve a/c
(Being  capital reserve adjusted)