S Y BCOM

SEM IV
Accountancy and Financial Management - II

Chapter -1

Introduction to Company Accounts

Topics to be covered
• Introduction of basic terms:
• Types of companies, nature and formation of
companies,
• Shares, Debentures, Share Capital, Reserves and
surplus,
• Types of assets and liabilities, dividend,
• Format of Balance Sheet (Only theory)
• Issue of shares: Different modes IPO, Private
Placements, Preferential, Rights, ESO, SWEAT and
ESCROW account,
• Issue of shares at par, premium and discount,
Topics to be covered
• Under subscription and Over subscription of
shares
• Forfeiture and reissue of forfeited shares
• Issue of shares for consideration other than cash.
(Only theory)
• Issue of Debentures: types of Debentures, Issue
of debentures at par, premium and discount, Issue
of Debentures with consideration of Redemption,
Issue of debentures for cash receivable in
installments or at a time Issue of debentures for
consideration other than cash. (Only theory)
Introduction of basic terms
Types of Companies
• On the Basis of Registration
Statutory Registered Chartered
Companies Companies Companies

 The Companies registered under Special Act of Central or State

Legislature are called Statutory Companies. E.g. RBI, LIC, UTI.

 The Companies registered under the Companies Act 2013 or under any
earlier Companies Act are known as Registered Companies E.g. Tata
Steel, Godrej.

 The Companies which are registered under the Special Charter granted
by king or queen of England are known as Charter Companies. E.g. East
India Company. Such companies are no longer in existence in India.
• On the Basis of Number of Members
Private Public One
Companies Companies Person
Companies
 A Private Company is one which has 2 to 200 members. It cannot invite
members of Public to subscribe its securities and its securities are not
freely transferable, there are restrictions on transfer.

 A Public Company is one which has 7 to unlimited number of members

and the securities of which are freely transferable without any
restrictions.

 The concept of One Person Company is introduced by the Companies

Act 2013. It is a Company which has only one person as its member.
• On the Basis of Liability of Members
Companies Companies Companies
Limited by Limited by with
Shares Guarantee Unlimited
Liability
 A Company Limited by Shares is where the Shareholder is liable only
for the unpaid amount on the shares purchased by him.

 A Company Limited by Guarantee is where the Memorandum of

Association (MOA) specifies the fixed amount beyond which the
member will not be liable to contribute in case of liquidation.

 A Company with Unlimited Liability is where the MOA does not have
any provision limiting the liability of its members. The liability of its
members is similar to that of the partners in a firm.
• On the Basis of Listing

Listed Unlisted
Companies Companies

 A Listed Company is one whose Shares are on the Stock

Exchange such as National Stock Exchange (NSE) or
Bombay Stock Exchange (BSE).

 An Unlisted Company is one whose shares are not listed on

the Stock Exchange
• Other Types of Companies

Small Associate Foreign

Companies Companies Companies

Government Non-Profit
Companies Companies
Holding &
Subsidiary
Companies
Illegal Producer
Associations Companies
Formation of Companies
Four Stages

I. Promotion of the Company

II. Incorporation of a Company

III. Commencement of Business

IV. Share Capital

Means of funding
• Share Capital
Types of Share Capital
- Preference Shares
- Ordinary or Equity Shares

• Debentures
Preference Shares
• Preference shares are entitled to a fixed
percentage of dividends before any ordinary
dividends are paid

• They usually do not have voting rights

• The different types of preference shares are:

– Cumulative preference shares
– Non-cumulative preference shares
Types of Preference Shares
• Cumulative preference shares
Any unpaid dividends on cumulative preference
shares can be carried forward to a later year.

• Non-cumulative preference shares

If the profits are insufficient to pay the dividends,

the unpaid dividends cannot be carried forward

to later years.
Ordinary / Equity Shares
• The dividends of ordinary shares are not fixed.
They depend on the return of the company.

• Ordinary shareholders are paid only after all

other claim (e.g. interest on loan and preference
share dividends) have been met.

• Ordinary shareholders have voting rights.

• They are the owners of the Company

Debentures
• Debentures are long-term loans evidenced by deeds.

• They are entitled to fixed rate of interest.

• Interest is payable every year.

• The debentures are to be repaid on the date of

redemption.

• Debenture holders are not the owners of the

company but Creditors of the Company.
Reserves
• They are the accumulated or undistributed profits
which have been retained within the company.

• Reserves are profits or gains which accrue only to

the ordinary shareholders.

• There are two types of reserves:

– Revenue reserves
– Capital reserves
Revenue Reserves
• They are undistributed trading profits i.e. the
profits out of the normal business of the Company.

• They can be used to pay dividends.

• They are also known as Free Reserves or Divisible

Profits

• E.g. the balance on the profit and loss account and

general reserve
Capital Reserves
• They are gains or profits arising from non-trading
or non-operating activities

• They are know as Non-divisible Profits also

• They are not available for distribution as dividends

• E.g. Share premium, revaluation reserve, capital

redemption reserve and debenture redemption
reserve
 S Y BCOM
SEM IV
Accountancy and Financial Management - II

Issue of Shares
Issue of Shares / Debentures
• Issue of Shares / Debentures can be at Par, Premium or
Discount.
• If the Shares / Debentures are issued at the Face Value
itself, it is known as issued at Par. E.g. Rs.10 / 100
• If the Shares / Debentures are issued at the price
higher than the Face Value/ par, it is known as issued at
Premium. This excess amount is called share premium.
This is a Capital gain for the Company. E.g. Rs.12 / 120
• If the Shares / Debentures are issued at the price
lower than the Face Value/ par, it is known as issued at
Discount. The deficit amount is called Discount. This is
a Capital loss for the Company. E.g. Rs.9 / 90
Under-Subscription
• Sometimes, the applications for shares received are
less than the number of shares issued. For instance,
a Company issued 10,000 shares to the public and
the Company received applications for 8000 shares
from the public. This situation is called Under-
subscription.
• In such cases, the allotment may be done to the
number of shares subscribed for i.e. 8,000 shares,
which is less than the issued shares. But if the
Company fails to receive the minimum subscription,
shares cannot be allotted. And all the application
money will be returned to the applicants.
Over-Subscription
• Sometimes, a Company receives applications for
a larger number of shares than offered by it to
public for subscription. For instance, a Company
issued 10,000 shares to the public and the
Company received applications for 12,000 shares
from the public. This situation is termed as Over-
subscription.
• However, allotment can be made only to the
number of shares that are issued. The Company
cannot allot more shares than the issued even if
there is demand for the shares.
• Since share applications have been received along-
with application money, it is necessary for the
Company to adopt any one of the following methods:

• (a)Rejection of Applications for Excess Number

of Shares

• (b)Allotment of Shares on Pro-Rata Basis to all

• (c) (i) Rejections of Some Applications

(ii) Allotment to Remaining Applicants on
Pro-Rata Basis
Payment on shares
• While applying for the shares, along with application
form, application money is to be paid.
• On application being accepted, shares are allotted to the
applicant and he has to pay the allotment money. And
the applicant becomes the shareholder of the company
• After this, as and when required the Company may ask
the shareholder to pay the balance money in form of
Call – there can be first call & the Final call, first and
second call, First, second and final call.
• This means that the money on share is paid in parts eg.
Rs. 3 Application Rs. 30 Application
Rs. 2 Allotment Rs. 20 Allotment
Rs. 3 First Call Rs. 30 First Call
Rs. 2 Final Call Rs. 20 Final Call
Forfeiture of shares
• If the shareholder fails to pay the allotment
money or the call money on his shares as called
upon by the company, his shares may be forfeited
by giving due notice and following the procedure
specified in the articles of Association on this
behalf. This is called forfeiture of shares.

• Effect of forfeiture of shares

The effect of the forfeiture is that the shares of the
defaulting share holders are cancelled, his name is
removed fro the register of members and the
amount already paid by him is forfeited.
Capital Structure
Authorized It is the maximum amount of share capital
Capital which the company is allowed to issue

Issued It is the nominal value of a portion of the

Capital authorized capital which has been taken up
(purchased) by shareholders

Called Up It is the amount of issued capital which the

Capital company has called to be paid

Paid Up It the amount of issued capital which has

Capital actually been received

Calls in It the amount of called up capital which

Arrears has not been received
 Reissue of the forfeited shares
• The directors of the company have the power to re-
issue the forfeited shares on such terms as it think fit.
• The forfeited shares can be reissued at par, or at
premium or at discount.
• However, if the forfeited shares are reissued at
discount, the amount of discount should not exceed
the amount credited to the share forfeiture A/c.
• The surplus left in the share forfeited A/c after its
reissue will be transferred to the Capital Reserve A/c.
as this surplus will be of the nature of capital profits.
Shares issued for Consideration other
than cash
• A company can issue its shares either For Cash or For
Consideration other than Cash.
• As is clear from the term itself, Shares issued for
consideration other than cash means when shares of the
company are issued to somebody for something which is
not cash.
• It can be issue of shares to a vendor against the purchase
of assets or it can be issue of shares against the purchase
of the entire business of an enterprise.
• It can also be an issue of shares to the brokers,
underwriters in lieu of their services to the company.
• In this case shares are not issued to the public in general.
Various modes of Issue of Shares
The various modes of issues of shares depend upon who are the
perspective investors, purpose of the company like to generate funds
or for the benefit of its shareholders. The different types of shares
issues in India are as shown in the picture. Let us see them how they
differ from each other.
Public Issue
• Public Issue: When the issue is for the general public and
anyone interested in to invest in the company can buy the
shares. It can be further of two types as follows:

• Initial Public Offer (IPO): When an unlisted company wants to

go public for the first time, it can be done through Initial Public
Offer. Here, the investors bid for the company within a band
(generally given by the company). The bidding value depends
upon the valuation of the company. IPO helps the company to
get listed and generate funds from public.

• Further Public Offer (FPO): Here the already listed company

generate the funds from the public (anyone interested) for few
projects, expansion etc.
Rights Issue & Bonus Issue
• Rights Issue: The listed company issues these securities
only to the existing shareholders of its company. It is
based on the ratio in which the shareholders are
holding number of shares on any fixed date. Generally,
the rights issue are on the discounted rate and are
beneficial for the shareholders. So, they prefer to
invest in the Right Shares.

• Bonus Issue: These shares are given to the existing

shareholders only, without any consideration from
them. These are issued on a fixed date based on the
ratio to the number on shares held by the shareholder.
Private Placement
• Private Placement: Here the company issues the
securities to the selected group of investors not
exceeding more than 49. It can be done in two ways :
• Preferential Issue: The listed company issues the equity
shares which have some more benefits over the normal
equity shares like in terms of dividends etc. These
benefits are mentioned at the time of issue. These are
done as per Chapter XIII of SEBI (DIP) guidelines.
• Qualified Institutional Placement (QIP):Here, the listed
company issues equity shares or shares convertible into
equity shares to Qualified Institutional Buyers only as
per Chapter XIIIA of SEBI (DIP) guidelines.
Employee Stock Option Plan (ESOPs)
• These are a special kind of stock options which are
issued only to the employees of the company.
• The shares are issued at a discounted price and
many have cash benefits also.
• This is done to develop the interest of the
employees as the stakeholders of the company for
its well being.
• This plan have the tax benefits for the employees.
• And the employee can hold the shares only till
retirement or till the person is employee of the
company.
Sweat Equity Shares

• These are the equity shares issued by a company

to its employees or directors 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.

• Issue of sweat equity shares to be authorized by

special resolution at a general meeting.
 Escrow Account
• Escrow is a legal concept in which a financial instrument or an
asset is held by a third party on behalf of two other parties that
are in the process of completing a transaction.
• The funds or assets are held by the escrow agent until it receives
the appropriate instructions or until predetermined contractual
obligations have been fulfilled.
• Money, securities, funds, and other assets can all be held
in escrow.
• Stocks, especially those of public companies, are often issued in
escrow. This means that while the shareholder is the real owner of
the stock, he has limited rights to dispose it off .
• For example, executives who receive stock as a bonus to their
compensation often have to wait for an escrow period to pass
before they can sell the stock. This is used as a tactic to retain top
executives and protects the stock's market price.
 S Y BCOM
SEM IV
Accountancy and Financial Management - II

Issue of Debentures
Topics to be covered
• Issue of Debentures
• Types of Debentures
• Issue of debentures at par, premium and discount
• Issue of Debentures with consideration of
Redemption
• Issue of debentures for cash receivable in
installments or at a time
• Issue of debentures for consideration other than
cash. (Only theory)
Issue of Debentures
• Debentures are issued in the same manner in which
shares are issued.
• The company issues a prospectus inviting applications
along with a sum of money called application money.
• After scrutiny, the Board of Directors makes
allotment of debentures.
• If the entire sum of money has not been asked for
along with applications another sum of money called,
allotment money may be asked for. Subsequently
there may be a few calls even.
• But mostly, the entire amount is received on
application or on application and allotment.
• It is usual to prefix “Debentures” with the rate of interest.
Thus, if the rate of interest is 14 per cent, the name given
will be “14% Debentures”.
• Like shares, debentures may be issued at par, at a
premium or at a discount.
• The law does not lay down any maximum limit for
discount on issue of debentures.
• The sanction of the Company Law Board is also not
needed.
• Debentures are invariably redeemable. They may be
redeemable at par or at a premium. Redemption of
debentures at a premium means that the company pays
to the debenture-holders, at the time of redemption, a
sum higher than the face value of debentures held by
Types Of Debentures

• On The Basis Of Security

a. Secured Or Mortgage Debentures

These are the debentures that are secured by a charge on the
assets of the company. These are also called mortgage
debentures. The holders of secured debentures have the right to
recover their principal amount with the unpaid amount of interest
on such debentures out of the assets mortgaged by the company.

b. Unsecured Debentures
Debentures which do not carry any security with regard to the
principal amount or unpaid interest are unsecured debentures.
These are also called simple debentures.
• On The Basis Of Convertibility
a. Convertible debentures are bonds that can
convert into equity shares of the issuing corporation
after a specific period of time. These types of bonds
are the most attractive to investors because of the
ability to convert, and they are most attractive to
companies because of the low interest rate.
b. Non-convertible debentures are regular
debentures that cannot be converted into equity of
the issuing corporation. To compensate, investors
are rewarded with a higher interest rate when
compared to convertible debentures.
• On The Basis Of Redemption
a. Redeemable Debentures
These are the debentures which are issued for a fixed
period. The principal amount of such debentures is
paid off to the holders on the expiry of such period.
These debentures can be redeemed by annual
drawings or by purchasing from the open market.

b. Non-redeemable Debentures
These are the debentures which are not redeemed in
the life time of the company. Such debentures are
paid back only when the company goes to
liquidation.
• On The Basis Of Record Point Of View

a. Registered Debentures
These are the debentures that are registered with
the company. The amount of such debentures is
payable only to those debenture holders whose
name appears in the register of the company.

b. Bearer Debentures
These are the debentures which are not recorded
in a register of the company. Such debentures are
transferable merely by delivery. Holder of bearer
debentures is entitled to get the interest.
Issue of Debenture
• The debentures may be issued:
(i) At par
(ii) At a premium
(iii) At a discount

(i) Issue of Debentures at Par:

Debentures are said to be issued at par when the
amount collected for it is equal to the nominal
value (face value) of the debentures; for example,
issue of Rs. 1,000 debenture for Rs. 1,000.
(ii) Issue of Debentures at Discount:
• When debentures are issued by company at a price less
than its nominal value (face value) it is said to be issued
at discount. It is important to note that the Companies
Act has not put any restriction on the maximum limit of
discount. For example, if a debenture of Rs. 1,000 is
offered to public at Rs. 950, it is issue at a discount. Here
Rs. 50 on each debenture is loss to the company. As a
principle of equity, it is desirable to write off this loss.
• Discount is a capital loss and until it is written off-
completely, it is shown on the asset side of balance
sheet, under the heading ‘Miscellaneous Expenditure’,
as a fictitious asset.
(iii) Issue of Debentures at Premium:
• If debentures are issued at a price more than its nominal
value (face value) such an issue is called issue at a
premium. For example, if a debenture of Rs. 1000 is
offered at 1,050, it is a case of issue of debentures at
premium. The excess of issue price over face value is
premium.

• The premium is a capital gain for company so it is to be

credited to ‘Securities Premium Reserve A/c’. The amount
of premium on debentures should not be transferred to
profit and loss account because it is not a profit arising
from the normal operations of the company. Since it is a
gain, it is shown on the liabilities side of balance sheet
under the head ‘Reserves and Surplus’.
Issue of Debentures for consideration other
than cash

• When a company purchases some assets and

issues debentures as a payment for the
purchase, to the vendors it is known as issue
of debentures for consideration other than
cash.

• Such Debentures can be issued to vendors at

par, at premium and at discount
ISSUE OF DEBENTURES AS COLLATERAL
SECURITY
• Collateral security means security given in addition to the
principal security. It is a subsidiary or secondary security.
• Whenever a company takes loan from bank or any financial
institution it may issue its debentures as secondary security
which is in addition to the principal security. Such an issue of
debentures is known as ‘issue of debentures as collateral
security’.
• The lender will have a right over such debentures only when
company fails to pay the loan amount and the principal security
is exhausted.
• In case the need to exercise this right does not arise debentures
will be returned back to the company.
• No interest is paid on the debentures issued as collateral
security because company pays interest on loan.