Company Accounts (1)

Fundamentals of Accounting
UNIT – 5 COMPANY ACCOUNTS
STRUCTURE
5.0 Objectives
5.1 Introduction to Joint-stock company
5.2 Essential characteristics of the company
5.3 Kinds of company & formation of the company
5.4 Meaning of share
5.4.1 Accounting entries for issue of shares
5.4.2 Calls in advance
5.4.3 Issue at premium and Discount
5.5 Forfeiture of share
5.6 Redemption of preference share
5.7 Preparation of final accounts
5.7.1 Trading Account
5.7.2 Profit & Loss Account
5.7.3 Profit & Loss appropriation account
5.7.4 Balance sheet.
5.8 Let Us Sum Up
5.9 Key Words
5.10 Some Useful Books
5.11 Answer to check your progress
5.12 Terminal Questions
5.0 OBJECTIVES
After studying this unit, you will be able to:
• Discuss essential features of joint stock company

• State the meaning and accounting treatment for share capital
• Prepare the final accounts for joint stock company
• Balancing accounts at the time of forfeiture and redemption
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Fundamental of accounting
5.1 INTRODUCTION TO JOINT-STOCK

COMPANY
Company accounts are known as a memorization of an organization's

financial activity which has been performed over a period of 12 month.
They are prepared for Companies House and HM Revenue & Customs
every year and consist of the Balance Sheet, the Profit and Loss
Statement, and the Cash Flow Statement. (“Company Profit Sharing
Accounts”) and any contributions made by an Employer under prior
plans, as well as to any income and/or earnings attributable to such
Company Contributions and prior plan contributions.
Company accounts are a summary of an organization’s financial activity
over 12 months. They are prepared for Companies House and HM
Revenue & Customs every year and consist of the Balance Sheet, the
Profit and Loss Statement, and the Cash Flow Statement.
Company accounts are used to track the cash balance, money owed to the
business, money owed to creditors, Excess, and access and the payroll
paid to employees.
Company accounts are an analysis of an organization’s financial activity
over a period (12 months). For showing the financial performance of a
company, accounts are maintained and they are prepared in corporate
accounting.
It is a recording of the issue of shares, debentures, etc. of the company.
Other routine accounts of the company are also recorded. With all these
details, every year the company prepares accounts consisting of the Cash
Flow Statement, the Profit and Loss Statement, and Balance Sheet.
With the technological improvements, the scale of operations has
increased. The requirements for finances and managerial resources have
gone up. The traditional forms of organisation such as sole-proprietorship
and partnership could not meet the requirements of business. The increase
in business volumes also brings in more liabilities. Under these
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circumstances the company form of organisation developed as the most
suitable alternative.
In this form of organisation a large number of persons known as
shareholders join hands to start a bigger business and the liability of
members is also limited to the extent of shares they have subscribed to.
Joint stock company form of organisation was first started in Italy in
thirteenth century.
In India the first Companies Act was passed in 1850 and the principle of
limited liability was introduced only in 1857. A comprehensive companies
act was passed in 1956 and all undertakings registered under this act are
known as ‘companies’. The companies started under state or central
legislations are called ‘corporations’.
Definitions:
A company is “an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or business,
and who share the profit and loss (as the case may be) arising therefrom.”
—James Stephenson
“A Joint Stock Company is a voluntary association of individuals for
profit, having a capital divided into transferable shares, the ownership of
which is the condition of membership.” —Prof. L.H. Haney
“A corporation is an artificial being, invisible, intangible and existing only
in contemplation of the law. Being a mere creation of law, it possesses
only the properties which the charter of its creation confers upon it either
expressly or as incidental to its very existence.” —Chief justice Marshall
“A company means a company formed an registered under this Act.”
— Section 3 of Indian Companies Act 1956
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Analysis of Definitions:
An analysis of above mentioned definitions brings out the following
facts:
1. A company is an artificial person under law.
2. It has separate legal entity than its members.
3. It possesses only those properties which have been conferred on it by
the charter of its creation.
4. It is a voluntary association of persons.
5. It is created to earn profits.
6. It has a capital which is contributed by the members.
7. The capital is divided into small parts known as shares.
8. The persons who own these shares are called members.
9. The shares of a company are easily transferable.
10. The capital of a company is employed for a common purpose.
Types of Companies:
On the basis of ownership the companies can be classified into
following categories:
1. Private Company
2. Public Company
1. Private Company:
According to companies Act, a private company is one which has the
following characteristics:
(i) It has a minimum of two members and a maximum of fifty members.
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(ii) A private company restricts the rights of members to transfer their
shares.
(iii) It prohibits any invitation to the public to subscribe to its shares and
debentures.
(iv) Does not invite general public to invest deposits in the company,
(v) It has a minimum paid up capital of Rs. One lakh.
A private company is an ideal form of organization when a business is to
be expanded at a large scale without involving large number of
shareholding groups.
2. Public Company:
According to Section 31(1)((iv) of the Indian Companies Act, all
companies other than private companies are called public companies. It is
a company in which public at large is interested.
A public company has the following trait:
(i) It is formed with a minimum of seven members.
(ii) It invites general public to subscribe to its shares.
(iii) There is no restriction on the maximum number of members.
(iv) It permits the transfer of shares.
(v) Has minimum paid up capital of Rs. Five lakhs.
(vi) It must allot shares within 120 days from the issue of prospectus.
(vii) Before starting the business it requires a certificate of commencement
from the Registrar of Companies.
Privileges or Benefits of a Private Company:

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A private company is given certain exemptions or privileges as compared
to a public company.
Some of the main privileges are as follows:
1. A private company can be started with just two members whereas a
public company required at least seven members.
2. A private company is not required to file a prospectus or a settlement in
lieu of prospectus with the Registrar of Companies.
3. There is no restriction of minimum subscription as in the case of public
company. It can directly allot the shares.
4. The company can start its work just after getting a certificate of
incorporation. It is exempted from the certificate of commencement.
5. It can work with just two directors.
6. A private company is not required to hold a statutory meeting and filing
a statutory report.
7. It is not under legal obligation to offer its issue of shares to the existing
shareholders on a pro rata basis as in the case of a public company.
8. Unless otherwise a higher quorum is provided, the minimum quorum in

a general meeting of shareholders is only two members personally present.
9. There is no limit on the remuneration of directors, managers, etc. in a
private company. It can be fixed beyond 11 percent which is a statutory
limit for a public company.
10. Investment in the same group of companies can be done without
restrictions.
Promotion of a Company:
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The promotion of every business requires a process to be followed. A
number of formalities have to be completed before a unit can come into
existence. The promotion of a company involves the conceiving of a
business opportunity and taking an initiative to give it a practical shape. A
person, a group or even a company may have discovered a business
opportunity.
5.2 ESSENTIAL CHARACTERISTICS OF THE

COMPANY
1. Voluntary Association:
A company is a voluntary association of two or more persons. A single
person cannot constitute a company. At least two persons must join hands
to form a private company. While a minimum of seven persons are
required to form a public company. The maximum membership of a
private company is restricted to fifty, whereas, no upper limit has been laid
down for public companies.
2. Incorporation:
A company comes into existence the day it is incorporated/registered. In
other words, a company cannot come into being unless it is incorporated
and recognised by law. This feature distinguishes a company from
partnership which is also a voluntary association of persons but in whose
case registration is optional.
3. Artificial Person:
In the eyes of law there are two types of persons viz:
(a) Natural persons i.e. human beings and
(b) Artificial persons such as companies, firms, institutions etc.
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Legally, a company has got a personality of its own. Like human beings it
can buy, own or sell its property. It can sue others for the enforcement of
its rights and likewise be sued by others.
4. Separate Entity:
The law recognizes the independent status of the company. A company
has got an identity of its own which is quite different from its members.
This implies that a company cannot be held liable for the actions of its
members and vice versa. The distinct entity of a company from its
members was upheld in the famous Salomon Vs. Salomon & Co case.
5. Perpetual Existence:
A company enjoys a continuous existence. Retirement, death, insolvency
and insanity of its members do not affect the continuity of the company.
The shares of the company may change millions of hands, but the life of
the company remains unaffected. In an accident all the members of a
company died but the company continued its operations.
6. Common Seal:
A company being an artificial person cannot sign for itself. A seal with the
name of the company embossed on it acts as a substitute for the company’s
signatures. The company gives its assent to any contract or document by
the common seal. A document which does not bear the common seal of
the company is not binding on it.
7. Transferability of Shares:
The capital of the company is contributed by its members. It is divided
into shares of predetermined value. The members of a public company are
free to transfer their shares to anyone else without any restriction. The
private companies, however, do impose some restrictions on the transfer
of shares by their members.
8. Limited Liability:
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The liability of the members of a company is invariably limited to the
extent of the face value of shares held by them. This means that if the
assets of a company fall short of its liabilities, the members cannot be
asked to contribute anything more than the unpaid amount on the shares
held by them. Unlike the partnership firms, the private property of the
members cannot be utilized to satisfy the claims of company’s creditors.
9. Diffused Ownership:
The ownership of a company is scattered over a large number of persons.
According to the provisions of the Companies Act, a private company can
have a maximum of fifty members. While, no upper limit is put on the
maximum number of members in public companies.
10. Separation of Ownership from Management:
Though shareholders of a company are its owners, yet every shareholder,

unlike a partner, does not have a right to take an active part in the day to
day management of the company. A company is managed by the elected
representatives of its members. The elected representatives are
individually known as directors and collectively as ‘Board of Directors’.
5.3 KINDS OF COMPANY & FORMATION OF

THE COMPANY
Company forms of businesses have become immensely popular over the

years. Their development has led to the creation of so many new types of
companies. Companies are to be classified on the basis of liabilities, members
and on the basis of control.
TYPES OF COMPANIES
• Companies Limited by Shares
• Companies Limited by Guarantee

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• Unlimited Companies
• One Person Companies (OPC)
• Private Companies
• Public Companies
• Holding and Subsidiary Companies
• Associate Companies
• Companies in terms of Access to Capital
• Government Companies
• Foreign Companies
• Charitable Companies
• Dormant Companies
• Nidhi Companies
• Public Financial Institutions
We can classify all these companies in various categories.
Classification of Different Types of Companies
COMPANIES ON THE BASIS OF LIABILITIES

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When we look at the liabilities of members, companies can be limited by
shares, limited by guarantee or simply unlimited.
a) Companies Limited by Shares

Sometimes, shareholders of some companies might not pay the entire value
of their shares in one go. In these companies, the liabilities of members is
limited to the extent of the amount not paid by them on their shares.
This means that in case of winding up, members will be liable only until they
pay the remaining amount of their shares.
b) Companies Limited by Guarantee

In some companies, the memorandum of association mentions amounts of
money that some members guarantee to pay.
In case of winding up, they will be liable only to pay only the amount so
guaranteed. The company or its creditors cannot compel them to pay any
more money.
c) Unlimited Companies
Unlimited companies have no limits on their members’ liabilities. Hence, the
company can use all personal assets of shareholders to meet its debts while
winding up. Their liabilities will extend to the company’s entire debt.
COMPANIES ON THE BASIS OF MEMBERS
a) One Person Companies (OPC)

These kinds of companies have only one member as their sole shareholder.
They are separate from sole proprietorships because OPCs are legal entities
distinct from their sole members. Unlike other companies, OPCs don’t need
to have any minimum share capital.
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b) Private Companies
Private companies are those whose articles of association restrict
free transferability of shares. In terms of members, private companies need
to have a minimum of 2 and a maximum of 200. These members include
present and former employees who also hold shares.
c) Public Companies
In contrast to private companies, public companies allow their members to
freely transfer their shares to others. Secondly, they need to have a minimum
of 7 members, but the maximum number of members they can have is
unlimited.
COMPANIES ON THE BASIS OF CONTROL OR HOLDING
In terms of control, there are two types of companies.
a) Holding and Subsidiary Companies

In some cases, a company’s shares might be held fully or partly by another
company. Here, the company owning these shares becomes the holding or
parent company. Likewise, the company whose shares the parent company
owns becomes its subsidiary company.
Holding companies exercise control over their subsidiaries by dictating

the composition of their board of directors. Furthermore, parent companies
also exercise control by owning more than 50% of their subsidiary
companies’ shares.
b) Associate Companies
Associate companies are those in which other companies have significant
influence. This “significant influence” amounts to ownership of at least 20%
shares of the associate company.
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The other company’s control can exist in terms of the associate company’s
business decisions under an agreement. Associate companies can also exist
under joint venture agreements.
COMPANIES IN TERMS OF ACCESS TO CAPITAL
When we consider the access a company has to capital, companies may be

either listed or unlisted.
Listed companies have their securities listed on stock exchanges. This means
people can freely buy their securities. Hence, only public companies can be
listed, and not private companies.
Unlisted companies, on the other hand, do not list their securities on stock
exchanges. Both, public, as well as private companies, can come under this
category.
OTHER TYPES OF COMPANIES
a) Government Companies
Government companies are those in which more than 50% of share capital
is held by either the central government, or by one or more state government,
or jointly by the central government and one or more state government.
b) Foreign Companies
Foreign companies are incorporated outside India. They also conduct
business in India using a place of business either by themselves or with some
other company.
c) Charitable Companies (Section 8)

Certain companies have charitable purposes as their objectives. These
companies are called Section 8 companies because they are registered under
Section 8 of Companies Act, 2013.
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Charitable companies have the promotion of arts, science, culture, religion,
education, sports, trade, commerce, etc. as their objectives. Since they do not
earn profits, they also do not pay any dividend to their members.
d) Dormant Companies
These companies are generally formed for future projects. They do not have
significant accounting transactions and do not have to carry out all
compliances of regular companies.
e) Nidhi Companies
A Nidhi company functions to promote the habits of thrift and saving
amongst its members. It receives deposits from members and uses them for
their own benefits.
f) Public Financial Institutions

Life Insurance Corporation, Unit Trust of India and other such companies
are treated as public financial institutions. They are essentially government
companies that conduct functions of public financing.
FORMATION OF THE COMPANY
The formation of a company goes through a number of steps, starting from

idea generation to commencing of the business. This whole process can be
broken down into 4 major phases or steps, which we will be discussing in
the lines below.
The major steps in formation of a company are as follows:
1. Promotion stage
2. Registration stage
3. Incorporation stage
4. Commencement of Business stage
Let us discuss these steps in detail.
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Promotion Stage: Promotion is the first step in the formation of a
company. In this phase, the idea of starting a business is converted into
reality with the help of promoters of the business idea.
In this stage the ideas are executed. The promotion stage consists of the
following steps:
1. Identify the business opportunity and decide on the type of

business that needs to be done.
2. Perform a feasibility study and determine the economic, technical
and legal aspect of executing the business.
3. Interest shown by promoters towards the business idea and supply
of capital and other necessary procedures to start the business.
Registration stage: Registration stage is the second part of the formation

process. In this stage, the company gets registered, which brings the
company into existence.
A company is said to be in existence, if it is registered as per the

Companies Act, 2013. In order to get a company registered, some
documents need to be provided to the Registrar of Companies.
There are several steps involved in the registration phase, and are as
follows:
1. Memorandum of Association: A memorandum of association

(MoA) must be signed by the founders of the company. A
minimum of 7 members are required in case of a public company
and 2 in case of a private company. The MoA must be properly
registered and stamped.
2. Article of Association: Article of Association (AoA) is also
required to be signed and submitted. All members who previously
signed MoA, should also be signing the AoA.
3. The next step is preparing a list of directors which should be filed
with the Registrar of Companies.
4. Directors of the company should provide a written consent
agreeing to be directors, should be filed with the Registrar of
Companies (RoC).
5. The notice of address of the office needs to be filed.
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6. A statutory declaration should be made by any advocate of either
the High Court or Supreme Court, or a person of the capacity of
Director, Secretary or Managing Director. This declaration shall be
filed with the RoC.
Certificate of Incorporation: Certificate of incorporation is issued when

the registrar is satisfied with the documents provided. This certificate
validates the establishment of the company in the records.
Certificate of commencement of business: Certificate of

commencement of business is required for a public company to start doing
business, while a private company can start business once it has received
the certificate of incorporation.
Public companies receiving the certificate of incorporation can issue

prospectus in order to make the public subscribe to the share for raising
capital. Once all the minimum number of required shares have been
subscribed, a letter should be sent to the registrar along with a bank
document stating the receiving of the money.
The registrar will issue a certificate upon finding the provided documents
satisfactory. This certificate is known as certificate of commencement of
business. The company can start business activities from the date of issue
of the certificate and the business shall be done as per rules laid down in
the MoA (Memorandum of Association).
Check Your Progress- 1

1. Explain major steps in formation of a company
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2. Give meaning of Associate companies

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3. Classify companies on the basis of membership

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5.4 MEANING OF SHARE
To take the right steps for becoming a seasoned investor, you must
understand that you can invest in a variety of stock market instruments.
These include shares, derivatives, mutual funds and bonds. Among these,
there are around 18 million investors in the stock/equity market. Stocks or
equities account for around 12.9% of the total investments in India.
Wondering what are shares, and how they are different from stocks? When
a company wants to raise capital for either expanding its business or for
operational requirements, it has two options: either borrowing money or
issuing stocks that provide part-ownership of the company to investors.
Shares are the smallest denomination of a company’s stocks, indicating a
portion of ownership of the company.
In simple words, a share indicates a unit of ownership of the particular

company. If you are a shareholder of a company, it implies that you as an
investor, hold a percentage of ownership of the issuing company. As a
shareholder you stand to benefit in the event of the company’s profits, and
also bear the disadvantages of the company’s losses.
TYPES OF SHARES
Now that you know share definition, you must understand that broadly
share can be of two types:
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• Equity shares
• Preference shares
Equity Shares Meaning
These are also known as ordinary shares, and it comprises the bulk of the
shares being issued by a particular company. Equity shares are transferable
and traded actively by investors in stock markets. As an equity
shareholder, you are not only entitled to voting rights on company issues,
but also have the right to receive dividends. However, the dividends -
issued from the profits of the company - are not fixed. You must also note
that equity shareholders are subject to the maximum risk - owing to market
volatility and other factors affecting stock markets - as per their amount of
investment. The types of shares in this category can be classified on the
basis of:
• Share capital
• Definition
• Returns
Classification Of Equity Shares On The Basis Of Share Capital
Equity financing or share capital is the amount raised by a particular

company by issuing shares. A company can increase its share capital by
additional Initial Public Offerings (IPOs). Here is a look at the
classification of equity shares on the basis of share capital:
• Authorised Share Capital: Every company, in its Memorandum

of Associations, requires to prescribe the maximum amount of
capital that can be raised by issuing equity shares. The limit,
however, can be increased by paying additional fees and after
completion of certain legal procedures.
• Issued Share Capital: This implies the specified portion of the
company’s capital, which has been offered to investors through
issuance of equity shares. For example, if the nominal value of one
stock is Rs 200 and the company issues 20,000 equity shares, the
issued share capital will be Rs 40 lakh.
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• Subscribed Share Capital: The portion of the issued capital,
which has been subscribed by investors is known as subscribed
share capital.
• Paid-Up Capital: The amount of money paid by investors for
holding the company’s stocks is known as paid-up capital. As
investors pay the entire amount at once, subscribed and paid-up
capital refer to the same amount.
Classification Of Equity Shares On The Basis Of Definition
Here is a look at the equity share classification on the basis of definition:
• Bonus Shares: Bonus share definition implies those additional

stocks which are issued to existing shareholders free-of-cost, or as
a bonus.
• Rights Shares: Right shares meaning is that a company can
provide new shares to its existing shareholders - at a particular
price and within a specific time-period - before being offered for
trading in stock markets.
• Sweat Equity Shares: If as an employee of the company, you
have made a significant contribution, the company can reward you
by issuing sweat equity shares.
• Voting And Non-Voting Shares: Although the majority of shares
carry voting rights, the company can make an exception and issue
differential or zero voting rights to shareholders.
Classification Of Equity Shares On The Basis Of Returns
On the basis of returns, here is a look at the types of shares:
• Dividend Shares: A company can choose to pay dividends in the

form of issuing new shares, on a pro-rata basis.
• Growth Shares: These types of shares are associated with
companies that have extraordinary growth rates. While such
companies might not provide dividends, the value of their stocks
increase rapidly, thereby providing capital gains to investors.
• Value Shares: These types of shares are traded in stock markets at
prices lower than their intrinsic value. Investors can expect the
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prices to appreciate over a period of time, thus providing them with
a better share price.
PREFERENCE SHARES MEANING
These are among the next types of shares issued by a company.

Preferential shareholders receive preference in receiving profits of a
company as compared to ordinary shareholders. Also, in the event of
liquidation of a particular company, the preferential shareholders are paid
off before ordinary shareholders. Here is a look at the different types of
shares in this category:
• Cumulative And Non-Cumulative Preference Shares

Meaning: In the case of cumulative preference shares, if a
particular company doesn’t declare an annual dividend, the benefit
is carried forward to the next financial year. Non-cumulative
preference shares don't provide for receiving outstanding
dividends benefits.
• Participating/Non-Participating Preference Share
Definition: Participating preference shares allow shareholders to
receive surplus profits, after payment of dividends by the company.
This is over and above the receipt of dividends. Non-participating
preference shares carry no such benefits, apart from the regular
receipt of dividends.
• Convertible/Non-Convertible Preference Shares
Meaning: Convertible preference shares can be converted into
equity shares, after meeting the requisite stipulations by the
company’s Article of Association (AoA), while non-convertible
preference shares carry no such benefits.
• Redeemable/Irredeemable Preference Share Definition: A
company can repurchase or claim redeemable preference share at
a fixed price and time. These types of shares are sans any maturity
date. Irredeemable preference shares, on the other hand, have no
such conditions.
5.4.1 Accounting entries for issue of shares
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Many times, it is seen that shares have been allotted to persons or firms,
from whom assets have been purchased. Such issues of shares have been
clearly shown in Balance Sheet and distinguish such shares from shares
issued for cash.
The journal entry is:
When the settlement is made by issue of shares of fully paid shares, such
shares are known as shares issued for consideration other than cash. These
shares may either be issued at par, or at a premium or at a discount.
The entries are:
Promoters bring the company into existence. For this, they may be
remunerated in the form of shares issued without payment.
The journal entry for such transaction is:
Illustration 1:
Prem Ltd. purchased assets of Rs. 1, 90,000 from Yogesh Ltd. It issued
equity shares of Rs. 10 each fully paid in satisfaction of their claim.
Show the journal entries if such issues are made: (a) at par, (b) at a discount
of 5% and (c) at a premium of 25%.
Solution:
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Illustration 2:
A Company purchased land costing Rs. 2, 00,000 and in payment allotted
2,000 shares of Rs. 100 each, as fully paid.
Give journal entries and Balance Sheet.
Solution:
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5.4.2 Calls in Arrears and Calls in advance
When a company issues its share in the market, public purchases its shares
and they become its shareholders. The Company may call the whole amount
at a time in a lump sum or partially by way of calls. Sometimes, the
shareholders may not pay the amount called on a particular date, that
amount is known as Calls in Arrears.
CALLS IN ARREARS AND CALLS IN ADVANCE
Calls-In-Arrears
If a shareholder is not able to pay the call amount due on allotment or on

any calls according to the terms, the amount that becomes due is Calls-In-
Arrears. We may transfer or not transfer the arrear amount on account of
allotment or calls to Calls-in-Arrears Account.
Methods of Accounting Treatment of Calls-In-Arrears
• Without opening Calls-in-Arrears Account
• By opening Calls-in-Arrears Account
Without opening Calls-in-Arrears Account
Under this method, we credit the receipt from shareholders to the relevant
call account and various call accounts will show debit balance equal to the
total unpaid amount of calls.
On a subsequent date, when we receive the amount of Calls-in-Arrears, we

debit Bank Account and credit the relevant Call Account.
For example, The company makes the first call @ ₹ 2 per share on
10,000 shares. The receipt of the amount on the first call is for 9,500 shares.
Entries will be as follows:
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Date Particulars Amount (Dr.)
1. Shares First Call a/c Dr. 20,000
To Share Capital a/c Cr.
(being the first call money due on 10,000

shares @ ₹ 2 per share)
2. Bank a/c Dr. 19,000
To Shares First Call a/c Cr.
(being first call money received only on

9,500 shares)
By opening Calls-in-Arrears Account
Under this method, we transfer the unpaid amount to Calls-In-Arrears

Account. As a result, Shares Allotment Accounts and Shares Calls
Accounts will not show any balance.
The Calls-in-Arrears Accounts will show a debit balance equal to the total
unpaid amount on allotment and calls. Later, on receipt of arrear amount,
we credit it to the Calls-in-Arrears Account.
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In the above example, if we open Calls-in-Arrears Account is then the first
two entries will be the same and third entry passed will be:
Amou
Amount
Date Particulars nt
(Cr.)
(Dr.)
1. Calls-in-Arrears A/c Dr. 1,000
To Shares First Call a/c Cr. 1,000
(Being unpaid amount on call

transferred to calls-in-arrears A/c)
In place of second and third entry we can also pass a combined entry which is as
follows:
Date Particulars Amount (Dr.) Amount (Cr.)
1. Bank a/c Dr. 19,000
Calls-in-Arrears A/c Dr. 1,000
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To Shares First Call a/c Cr.
On receipt of Calls-in-Arrears at a subsequent date:
Amount Amount
Date Particulars
(Dr.) (Cr.)
1. Bank a/c Dr. XXX
To Calls-in-Arrears a/c Cr. XXX
We show the Calls-in-Arrears Account in the Notes to Accounts on

Share Capital to the Balance Sheet as a deduction from the amount of
‘Subscribed but not fully paid-up’ under ‘Subscribed Capital’.
Calls-In-Advance
If a company accepts the amount against the call or calls which are not
made yet, the amount so received in advance is called Calls-In-Advance.
It may also happen in case of partial or pro-rata allotment of shares when

the company retains excess amount received on the application of shares
beyond the allotment money.
We show the Calls-In-Advance in the Equity and Liabilities part of the

Balance Sheet under the head Current Liabilities and sub-head Other
Current Liabilities.
Journal entry to record Calls-In-Advance is:
270
Amount
Date Particulars Amount (Dr.)
(Cr.)
1. Bank a/c Dr. XXX
To Calls-In-Advance
Cr. XXX
a/c
(being money received in

advance against the calls)
2. Calls-In-Advance a/c Dr. XXX
To Shares Relevant
Cr. XXX
Call a/c
(being calls –in –advance

transferred to the share
call A/c)
SOLVED EXAMPLE ON CALLS IN ARREARS AND CALLS IN

ADVANCE
The Indore Coir Mills Ltd. With a registered capital of 5,00,000 Equity
Shares of ₹ 10 each, issued 2,00,000 Equity Shares, payable ₹ 3 on the
271
application, ₹ 2 on the allotment, ₹ 3 on the first call and ₹ 2 on second and
final call.
The company duly receives the amount due on allotment. One shareholder
holding 6,000 Equity Shares pays second and final call along with the first
call. While five shareholders with a total holding of 10,000 Equity Shares
did not pay the first call on their Equity Shares. The company did not make
the final call.
Pass journal entries to record the transactions.
Ans:
In the Books of Indore Coir Mills Ltd.
JOURNAL
Amount Amount
Date Particulars
(Dr.) (Cr.)
1. Bank a/c (2,00,000 @ ₹ 3) Dr. 6,00,000
To Equity Shares
Cr. 6,00,000
Application a/c
(Being application money

received)
272
2. Equity Shares Application a/c Dr. 6,00,000
To Equity Shares Capital a/c Cr. 6,00,000
(Being application money

transferred to Equity Share
Capital Account)
Equity Shares Allotment a/c

3. Dr. 4,00,000
(2,00,000@ ₹2 per share)
To Equity Share Capital a/c Cr. 4,00,000
(Being amount due on

allotment)
4. Bank a/c Dr. 4,00,000
To Equity Shares Capital a/c Cr. 4,00,000
(Being allotment money

received)
273
Equity Shares First Call a/c

5. Dr. 6,00,000
(2,00,000 @ ₹ 3 per share)
To Equity Share Capital a/c Cr. 6,00,000
(Being first call money due)
6. Bank a/c Dr. 5,82,000
To Equity Shares First Call

Cr. 5,70,000
a/c
To Calls-In-Advance a/c 12,000
(Being first call money received on 1,90,000

shares @ ₹ 3 per share and ₹ 2 per share on 6,000
shares received in advanced)
BALANCE SHEET OF INDORE COIR MILLS LTD as at…
274
Note
Particulars Amount
No.
I EQUITY AND LIABILITIES
1 Shareholders’ Funds
Share Capital 1 15,70,000
2 Current Liabilities
Other Current Liabilities 2 12,000
Total 15,82,000
II ASSETS
Current Assets
Cash and Cash Equivalents 3 15,82,000
275
Total 15,82,000
Notes to Accounts
1 Share Capital
Authorized Capital
5,00,000 Equity Shares of ₹10 each 50,00,000
Issued Capital
2,00,000 Equity Shares of ₹ 10 each 20,00,000
Subscribed Capital
Subscribed but not fully paid-up
2,00,000 Equity Shares of ₹ 10 each; ₹ 8

called-up 16,00,000
276
Less: Calls-in-Arrears ( 10,000 x ₹ 3

15,70,000
) 30,000
2 Other Current Liabilities
Calls-in-Advance 12,000
3 Cash and Cash Equivalents
Cash at Bank 15,82,000
5.4.3 Issue at premium and at Discount

Issue of Shares at Premium
We all know that the capital of a company consists of shares. The Public
Company invites the public to apply for and subscribe to its share capital.
For this purpose, it also issues a Prospectus. The company generally issues
its shares at par i.e. at its face value. However, a company may choose to
bring an Issue of Shares at Premium.
Issue of Shares at Premium
The issue of shares at premium refers to the issue of shares at a price
higher than the face value of the share. In other words, the premium is
the amount over and above the face value of a share.
Usually, the companies that are financially strong, well- managed and
have a good reputation in the market issue their shares at a premium. For
example, if a company issues a share of nominal or face value of ₹10 at
₹11, it issues it at 10% premium.
277
A company may call the amount of premium from the applicants or
shareholders at any stage, i.e. at the time of application, allotment or
calls. However, a company generally calls the amount of Premium at the
time of allotment.
Accounting treatment of Securities Premium
The company needs to credit the amount of Premium in a
separate account i.e. Securities Premium A/c, as it is not a part of the
Share Capital. It is actually a gain for the company. As per the
Companies Act, 2013 the company shows the credit balance of the
Securities Premium A/c under the heading ‘Reserves and Surplus’ on the
liabilities side of the Balance Sheet.
Also, section 52 of the Companies Act, 2013 states how a company can
use the Securities Premium. The following are the provisions regarding
this:
1. The company can use the amount towards the issue of un-issued
shares to the shareholders or members of the company as fully
paid bonus shares.
2. It can use this amount to write off the preliminary expenses.
3. The company may use it to pay the premium on the redemption
of debentures or redeemable preference shares.
4. It can also use this amount to write off the expenses incurred,
commission paid or discount allowed on the issue of any
securities or debentures.
5. It can also use it for buy-back of own shares or any other
securities.
Journal entries for the issue of shares at Premium
1. Premium is due at the time of application.
1. On receipt of Application money
Bank A/c (application and premium amount) ……….Dr.
To Share Application A/c Cr.
(Being application money received on shares)
2. Transfer of application money to Share Capital A/c and Securities
Premium A/c
Share Application A/c ……….Dr.
To Securities Premium A/c Cr.
278
To Share Capital A/c Cr.
(Being share application money transferred to share capital)
3. On Share Allotment due

Share Allotment A/c (amount due on allotment)…….Dr.
(Being share allotment due)
4. Share Allotment money received
5. Bank A/c (actual amount received) ………Dr.
To Share Allotment A/c Cr.
(Being share allotment money received)
6. On Share call due
Share Call A/c …………..Dr.
(Being money on share call due)
7. Share call amount received
Bank A/c…………….Dr.
To Share Call A/c Cr.
(Being share call amount received)
Premium is due at the time of allotment.

1. On receipt of application money
Bank A/c (actual amount received)………..Dr.
To Share Application A/c Cr.
(Being application money received on shares)
2. Transfer of application money to Share Capital A/c
Share Application A/c………. Dr.
(Being share application money transferred to share capital)
3. On Share Allotment and Premium due

Share Allotment A/c
(amount due on allotment including premium)………….Dr.
279
To Securities Premium A/c Cr.
(Being share allotment money and premium due)
4. Share Allotment money received
Bank A/c (allotment and premium amount received)…… Dr.
To Share Allotment A/c Cr.
(Being share allotment money received)
5. On Share call due
Share Call A/c ………….Dr.
(Being money on share call due)
6. Share call amount received
Bank A/c ……………….Dr.
To Share Call A/c Cr.
(Being share call amount received)
Solved Example on Issue of Shares at Premium

Sahni Ltd. issues 10000 equity shares of ₹100 each at 25% premium.
Premium is due at the time of allotment. The amount payable is as
follows:
Jan 1, 2018: On Application ₹20
Feb 1, 2018: On Allotment ₹75
Mar 1, 2018: On First and Final Call ₹30.
The company makes allotment properly. Show necessary journal entries.
Ans:
Journal Entries
In the books of Sahni Ltd.
280
Amount Amount
Date Particulars
(Dr.) (Cr.)
1 Jan Bank A/c Dr. 200000
To Share
Cr. 200000
Application A/c
(Being application
money received on
10000 shares @20
per share)
Share Application
1 Feb Dr. 200000
A/c
To Share Capital
Cr. 200000
A/c
(Being share
application money
transferred to share
capital)
281
Share Allotment
1 Feb Dr. 750000
A/c
To
Cr. 500000
Share Capital A/c
To Securities
Cr. 250000
Premium A/c
(Being share
allotment due on
10000 shares @50
per share)
1 Feb Bank A/c Dr. 750000
To Share
Cr. 750000
Allotment A/c
(Being share
allotment money
received)
282
Share First and

1 Mar Dr. 300000
Final Call A/c
To Share Capital
Cr. 300000
A/c
(Being money on
share call due on
10000 shares @30
per share)
1 Mar Bank A/c Dr. 300000
To Share First
Cr. 300000
and Final Call A/c
(Being share call

amount received)
Issue of Shares at Discount

No company can assume its existence in the economy without proper
finance or funds. Money plays an important part in their establishment as
well as their retention. But the problem is that private sources of funds are
not sufficient for meeting the overall requirement of the enterprise. Here
comes the concept of shares. Here, we will look at ‘Issue of Shares at
Discount’.
Introduction to Issue of Shares at Discount
283
In general, share means a portion of a larger thing. Similarly, in real
market share is a small proportion of the total amount of capital of the
enterprise. Shares form the major source of any company’s finance in
this present world.
Shares tempt the investors also because it can give huge profits to them
unlike the fixed rate of return on debentures. There are various ways or
prices at which a company issues its shares like at par, at a premium and
at discount.
The issue of shares at a discount means the issue of the shares at a price less
than the face value of the share. For example, if a company issues share of
Rs.100 at Rs.90, then Rs.10 (i.e. Rs 100—90) is the amount of discount.
It is nothing but a loss to the company. One must remember that the issue
of share below the Market Price (MP) but above the Face Value (FV) is not
termed as ‘Issue of Share at Discount’.
The issue of Share at Discount is always below the Nominal Value (NV) of
the shares. The company debits it to a separate account called ‘Discount on
Issue of Share’ Account.
CONDITIONS FOR ISSUE OF SHARES AT DISCOUNT
1. In order to issue the shares at a price less than the face value,
the company has to get permission from the relevant
authority. For seeking permission, they should call and upon
a general meeting and discuss and authorize the matter in that
meeting.
2. There is a cap on the rate of discount. A company cannot

issue any shares at more than 10% discount.
3. The company should issue the shares within 60 days of

receiving permission from the relevant authority. In certain
cases, the company can extend this time frame after getting
permission in the permission.
284
4. The company cannot issue these shares before passing of 1
year from the date of commencement of business.
5. The shares must belong to the same class of shares which are
already available in the market. For example, if the has
previously issued Equity shares then this time also, the
company has to issue Equity shares only.
6. Also, the company has to acquire the sanction by the Central

Government after getting approval from the general meeting.
Note: In case of rehabilitation of sick industries, the permission of

‘Tribunal’ is required rather than the ‘Central Government’.
JOURNAL ENTRIES
Generally, the shares are issued at discount at the time of allotment of

shares. So, all the entries other than the allotment entries will be unaffected
by these shares.
1. Entry for Due of Allotment
Journal
Da
Particulars L.F. Amount Dr. Amount Cr.
te
Share Allotment With the

A/c Dr. amount due
285
With the
Discount on Issue of Shares
amount of
A/c Dr.
discount
To Share Capital
A/c Cr.
(Being the allotment money due)
2. Entry for Amount Received
Journal
Date Particulars L.F. Amount Dr. Amount Cr.
With the
Bank
amount of
A/c
money
Dr.
received
To Shares Allotment Amount of money

A/c Cr received
286
(Being the receipt of the amount of

allotment)
3. Writing-off the Discount on Issue of Shares
Journal
Date Particulars L.F. Amount Dr. Amount Cr.
With the
Profit and Loss A/c/ Securities
amount of
Premium A/c Dr.
discount
With the
To Discount on Issue of
Amount of
Shares Cr.
Discount
(Being the amount of discount on

issue of shares written off)
Entry if shares are issued to the underwriters
Journal
287
D
L.
at Particulars Amount Dr. Amount Cr.
F.
e
Bank With the

A/c amount
Dr. received
Issue of Shares at Discount Amount of

A/c Dr. Discount
Total amount
Share Capital (Amount
A/c received and
Cr. amount of
discount)
(Hence, the application

money received after
adjustment of discount)
Entry if shares are issued to the promoters for their service
Journal
288
Da L. Amoun Amoun
Particulars
te F. t Dr. t Cr.
Amoun
t of
Preliminary expenses
Prelimi
A/c
nary
Dr.
Expens
es
With
the
Issue of Shares at
amount
Discount
of
A/c Dr.
discoun
t
With
total
amount
(Prelimi
nary
Share Capital
expense
A/c
s and
Cr.
the
amount
of
discount
)
289
(Being the shares

given to the Promoters
for their services)
SOLVED QUESTION ON ISSUE OF SHARES AT DISCOUNT
Question 1: What will be the treatment of balance of ‘Discount on issue

of shares A/c’ if the company does not write it off? What will be the
Journal Entry if shares are issued at a discount and all money is called
at the time of application? No. of shares = 100, Face Value= Rs.10,
Discount =Rs.1
Answer: The company will show it in the balance sheet on the Assets side
under the heading ‘Miscellaneous Expenditure’. This is a fictitious asset
and should be gradually written off by transfer to P&L A/c although there
is no compulsion to do so.
Journal
Amo Amo
Da L.
Particulars unt unt
te F.
Dr. Cr.
X Bank
X A/c 900
X Dr.
290
To Share Application and

900
Allotment A/c Cr.
(Being the amount received

after discount)
X
Share Application and
X 900
Allotment A/c Dr.
X
Discount on Issue of Shares

100
A/c Dr.
To Share Capital
1,00
A/c
0
Cr,
(Being the allotment done)
5.5 FORFEITURE OF SHARE
Share is a part of ownership in a company or a business or an

organization. A person holding the Shares of the company is an equal
owner to the profit and loss incurred by the company. The Companies
Act 2013, deals with different types of Shares like equity Shares and
291
preferential Shares. The Forfeiture of Shares is an action taken by the
company and its board of directors when the shareholders fail to pay the
due on the share.
An enterprise forfeits a share if a shareholder fails to meet its buying,
holding or selling criteria. It includes numerous requirements like
payment of call money, transfer of Shares over a restricted period, or
even avoiding selling. Vitally, in the event of Forfeiture of Shares,
neither does a member owe any balance on it, nor any profit.
Additionally, this share becomes an asset owned by the enterprise that
issued it.
Forfeiture can happen due to numerous reasons like non-payment of
dues, delay in installments, etc. Incidentally, a company is legally
allowed to forfeit a share only if they allow such action under their
Article of Association.
Immediate Impact of Forfeiture of Shares

When a shareholder is unable to pay his/her installment or dues known as
the call money, their Shares are forfeited. Consequently, the following
results are vital to note while understanding Forfeiture of shared
meaning.
1. A concerned shareholder’s personal Shares are canceled and

forfeited.
2. Every entry associated with a forfeited stock is converted in their
respective accounting records. However, this is not applicable for
Shares that are associated with premiums.
3. Amounts called up for these relevant Shares are debited from the
relevant share capital account.
What are the Accounting Entries for Forfeiture of Shares?

While understanding the procedure of Forfeiture of Shares, it is essential
to understand related accounting entries. Typically, companies issue
forfeited Shares at premium or par, both being discussed below in detail.
Issued at Par: When Shares issued at par are forfeited, the following
actions are taken by the company. It is typically in effect for Forfeitures
292
made due to non-payment of call money despite making calls on Shares
and stocks.
• Called-up amounts on these Shares as on this current date of

Forfeiture are debited from the relevant share capital account of a
company.
• The arrears of allotment and call accounts of these Shares are
maintained along with this called-up amount being credited in its
relevant account.
The accounting entries for Forfeiture of Shares issued at par are as

follows.
Amount Credit
Date Particular
(Dr.) (Cr.)
Share Capital account (called-

Dr. abc
up amount)
To Share Forfeiture account

Cr. abc
(paid-up amount)
To Share Allotment account Cr. abc
To Share Call accounts

Cr. abc
(individual accounts)
Issued at Premium: During Forfeiture of Shares issued at a premium,

there are primarily two options for a company. This depends on the
clearance of a security premium amount. Both situations related to this
are explained below.
• On Receipt of Security Premium Amount
293
In this case, the called-up amount is debited along with its share
capital amount from its relevant account. Furthermore, this
amount is also directly credited to every relevant account. This
includes First call and Final call accounts, Shares allotment which
include an amount not received during its process and Forfeited
Shares which has a received amount with a lower premium.
Amount Credit
Particular
(Dr.) (Cr.)
Share capital account Dr. 10,000
To Share allotment account Cr. 6,000
To Forfeiture share allotment

Cr. 2,000
account
To First calls account Cr. 2,000
• Non-Receipt of Security Premium Amount
Since in this case, the security premium amount is not received, it

involves an additional step of crediting this amount. This called-
up amount is debited along with its share capital amount to the
First call and Final call accounts, Share allotment including its
related charges, and finally Forfeited Shares that have a received
amount. Additionally, the security premium is also debited from
the share capital account.
Particular Amount (Dr.) Credit (Cr.)
Share capital account Dr. 10,000
294
Share premium account Dr. 10,000
To Share allotment account Cr. 6,000
To Forfeiture calls account Cr. 4,000
To First call account Cr. 4,000
Understandably, it is important to note these various types of accounting

methods which are relevant in diverse types of situations related to
Forfeiture of Shares. It is imperative that students note its various
differences and nuances in detail before calculating and making an entry.
What is the Accounting Treatment for Forfeiture of Shares?
While accounting entries above have been explained with the Forfeiture
of Shares example, it is important to note these accounting treatments
mentioned below. Any of these adjustments are immediately in effect
while reversing the entries for forfeited Shares.
• The total called-up amount for a forfeited share(s) is debited from

its share capital account.
• This total called-up amount for Forfeiture of a share(s) is credited
to the relevant share Forfeiture account.
Vitally, these are in effect only when a shareholder or owner is unable to

clear their called-up amount. Companies typically provide a notice
period before a shareholder’s stocks are forfeited.
What is the Effect of Forfeiture of Shares?

The primary effect of forfeiture of Shares is that a defaulter ceases to be
a part-owner of this company whose share has been forfeited due to
delay or lack of payment. However, this does not clear a shareholder of
295
associated liabilities. A shareholder is still accountable to paying his/her
associated financial liabilities as due on the date of their forfeiture.
The process of forfeiting shares starts with the company’s secretary,
making a list of the defaulters. The secretary places the list in front of the
board of directors and they issue instructions to send notice to all the
defaulters to pay the call money along with the interest within 14 days. If
the defaulters do not pay the due, a second notice is sent to them and if it
continues, their shares are forfeited in the next meeting.
Check Your Progress-2

1. Discuss effects of forfeiture of shares
..........................................................................................................
..........................................................................................................
..........................................................................................................
..........................................................................................................
2. What is the Accounting Treatment for Forfeiture of Shares?
..........................................................................................................
..........................................................................................................
..........................................................................................................
..........................................................................................................
5.6 REDEMPTION OF PREFERENCE SHARE
Redemption of preference shares means returning the preference share
capital to the preference shareholders either at a fixed date or after a certain
time period during the life time of the company provided company must
complied certain conditions.
According to Section 100 of the Companies Act 1956, a company is not
allowed to return to its shareholders the share money without the
permission of the court. A refund of money to shareholders on capital
296
account, while the company is in existence, requires court’s sanction in
addition to the special procedure. But Section 80 of the Companies Act
allows a company, if authorized by its articles to issue preference shares
which at the option of the company may be redeemed, if the conditions as
laid down under this Section are to be satisfied.
The following are the important provisions regarding the redemption
of preference shares which are given under Section 80 of the
Companies Act:
(1) Company must be authorized by its articles of association.
(2) No such shares shall be redeemed unless they are fully paid up. The
partly paid up shares cannot be redeemed. If they are partly paid in that
case a final call be made to convert them from partly paid to fully paid
only then redemption can be carried out.
(3) Such shares can be redeemed
(a) Out of the profit of the company which would otherwise be available
for the dividend; or
(b) Out of the proceeds of a fresh issue of shares made for the purpose of
redemption.
(4) If the shares are redeemed out of profits available for the distribution
for dividend, a sum equal to the nominal amount of the shares so redeemed
must be transferred to reserve account to be called ‘Capital Redemption
Reserve Account’
(5) If preference shares are redeemed at premium, then such premium must
be provided either out of the profits of the company or out of the
company’s security premium account.
297
(6) The Capital Redemption Reserve Account can be utilized for the issue
of fully paid bonus shares to the shareholders.
Redemption of preference shares by a company is not taken as reducing
the amount of its authorized share capital and as such provisions of the act
with regard to reduction of capital are not required to be complied with.
Shares already issued of other type can not be converted into redeemable
preference shares.
No company limited by shares shall, after the commencement of the
companies (amendment Act, 1996), issue irredeemable preference shares
or redeemable preference shares which are Redeemable after 20 years of
its issue.
If company fails to comply with these provisions, the company and every
officer of the company who is in default shall be punishable with fine
which may extend to Rs. 10,000. Redemption of redeemable preference
shares shall be notified to the registrar of companies within one month of
redemption.
Profits available for dividend or the profit out of which the Capital
Redemption Reserve Account is allowed:
The Companies Act permits the redemption of shares from out of the
profits, which are otherwise available for dividend. In case the redemption
is out of profits, the company is expected to transfer an equal amount to
an account called ‘Capital Redemption Reserve Account’ out of divisible
profits. The following are the profits which are available for dividend.
298
Central Idea:
Whatever be the source of funds for redemption, the original paid up
capital of the company must not be reduced by a single rupee. Redemption
should not affect adversely the interests of the creditors.
It can happen as follows:
If a company redeems preference shares and soon after, it goes into
liquidation, if the amount available is not sufficient in that case though
preference share holders got their full dues where as the creditors suffered.
It is not allowed under law. Creditors must get priority over the
shareholders. Therefore the Companies Act has laid down manifold
conditions for the redemption of preference shares.
5.7 PREPARATION OF FINAL ACCOUNTS
Final accounts are those accounts that are prepared by a joint stock
company at the end of a fiscal year. The purpose of creating final
accounts is to provide a clear picture of the financial position of the
organisation to its management, owners, or any other users of such
accounting information.
Final account preparation involves preparing a set of accounts and
statements at the end of an accounting year. The final account consists of
the following accounts:
1. Trading and Profit and Loss Account

2. Balance Sheet
3. Profit and Loss Appropriation account
299
Objectives of Final Account preparation
Final accounts are prepared with the following objectives:
1. To determine profit or loss incurred by a company in a given

financial period
2. To determine the financial position of the company
3. To act as a source of information to convey the users of
accounting information (owners, creditors, investors and other
stakeholders) about the solvency of the company.
5.7.1 Trading Account:

The aim of the Trading Account is to find out Gross Profit or Gross
Loss of company. Gross Profit/Loss is the difference between net sales
and cost of goods sold. This account contains opening and closing
balance of inventory, net purchases and net sales and all expenses
incurred on purchase or purchase of inventory.
Trading Account Format
Name of Company
Trading Account
For the Period / Year ended ……
300
5.7.2 Profit & Loss Account:

Profit and Loss Account is important part of company final account.
Gross profit or gross loss calculated in trading account is taken to the
second account called Profit and Loss Account. All remaining expenses
301
or losses are shown on debit side and other income or gains are reported
on credit site of this account.
Profit and Loss Account Format
Name of Company
Profit and Loss Account
302
303
5.7.3 Profit & Loss appropriation account:
Profit and Loss Appropriation Account is component of company
final accounts. This account is a subdivision of the profit and loss
account, which shows the profits available for distribution among
the shareholders and the division proposed in different heads. The
net profit/loss shown by the profit and loss account is transferred
to the credit of this account. Any balance of profit left from the
previous year will also appear as the first item on the credit side
of the account. On the debit site of this account will appear all
such items as represent allocations or appropriations of net profit,
such as dividend declared, amount set aside for debenture
redemption fund, reserve fund etc. Provisions made in respect of
income tax payable, as also any percentage of net profits payable
to the general manger should be charged to this account. This
account must always show a credit balance representing profit not
distributed and will appear on the liabilities side of the balance
sheet.
Profit and Loss Appropriation Account Format
Name of Company
Profit and Loss Appropriation Account
304
5.7.4 Balance sheet.
Every company is required to prepare a Balance Sheet at the end of each

trading period. Balance sheet shall give a true and fair view of the state
of affairs of the company at the end of its financial year and should
comply with requirements of IAS, IFRS and prevailing laws and
regulation of particular country. This statement contains assets, liabilities
and share capital accounting with sub-types.
Balance Sheet Format
Name of Company
Balance Sheet
As on ……
305
306
307
ILLUSTRATIONS:
Q. Following is the Trial Balance of Rajesh Ltd., Gurgaon as on

31.12.2009.
Adjustments:
1. Transfer Rs. 10000 to Reserve Fund.
2. Provide depreciation on building at 5%.
3. Stock on 31.12.2009 was valued at Rs. 12000.
4. Dividend at 15% on share capital is to the provided.
5. Depreciation on Plant and Machinery at 10%.
Prepare Trading, Profit and Loss Account, Profit and Loss Appropriation
Account and Balance Sheet in the prescribed form.
308
Solution:
The solution will be as follows:
309
Illustration 2
From the trial balance of Ajith and the adjustments given below,
prepare trading and profit and loss A/c for the year ended 31st
March, 2016 and the balance sheet as on that date.
310
Adjustments:
i. Stock at the end of the year was Rs. 8,000
ii. Further bad debts amounted to Rs. 100
iii. Create 2% provision for doubtful debts on sundry

debtors
iv. Create 1% provision for discount on sundry debtors
311
Illustration 3
The following trial balance has been extracted from the books
of Rajesh on 31st December, 2016.
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The following adjustments are to be made:
i. Stock on 31st December, 2016 was Rs. 28,000
ii. Unexpired insurance was Rs. 15,000
iii. Provision for doubtful debts is to be maintained at 5%

on sundry debtors.
iv. Depreciate plant and machinery at 20%.
You are required to prepare trading and profit and loss account
for the year ended 31st December, 2016 and a balance sheet as
on that date.
313
5.8 LET US SUM UP
Initially, the transactions are recorded in the Journal of the company,

which is then reflected in the individual ledgers maintained for the relative
transaction type & party. The closing balance of this ledger is maintained
in the Trial Balance, which shows equal debit and credit side for the
period. Then for providing the status & performance of the business
314
organization for the specified period (i.e., a year, half-year, quarter, etc.),
Final accounts are prepared which included Trading Account
for calculation of Gross profit (now generally inclusive with the statement
of profit & loss), Statement of Profit & Loss for net profit earned during
the period and Balance Sheet which provide the Assets & Liabilities of the
entity at the period ends.
To calculate the financial position of a particular organization and to get

them accounts at the end of a fiscal year is known as final accounts. A
journal is recorded and prepared regularly and transferred to a ledger to
get final accounts prepared.
It helps to keep a track of the management and the financial position final
account includes four major components which can be listed below as
trading account manufacturing account profit and loss account balance
sheet.
Final accounts are an essential financial component of any accounting year

for every company. Simply put, it is the full and final accounting
procedure which is carried out at the end of an accounting year, resulting
in the preparation of relevant accounts. It derives reference from the final
trial balance, which is itself a reference to the ending balance in every
ledger account. The final accounts for all companies must be produced on
or by the 31st of March every year as it marks the end of a financial year.
5.9 KEY WORDS
1. Cash flow statement: A cash flow statement, also known as statement

of cash flows, is a financial statement that shows how changes in balance
sheet accounts and income affect cash and cash equivalents, and breaks
the analysis down to operating, investing and financing activities.
2. Commencement: It is a Declaration to be issued by the directors within

180 days of incorporation of company stating that the subscribers to the
Memorandum of the company has paid the value of shares so agreed by
them, along with a verification of registered office address of the company.
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3. Incorporation: Incorporation is the legal process used to form a
corporate entity or company. A corporationis the resulting legal entity that
separates the firm's assets and income from its owners and investors.
4. Memorandum of Association: The memorandum of association is

the basic charter on which the company is based and is mandatory for a
company. The memorandum of association is the constitution of the
company because it defines its limitations and the sphere of its activities.
5. Arrears: It is the unpaid amount of shares that shareholders fail to pay

due on allotment or on calls.
6. Securities premium: The security premium is the difference between

the little value of the securities and the offer price. A corporation may issue
securities at a price higher than the little value.
5.10 ANSWER TO CHECK YOUR PROGRESS
Answer1: The major steps in formation of a company are as follows:
5. Promotion stage
6. Registration stage
7. Incorporation stage
8. Commencement of Business stage
Answer2: Associate companies are those in which other companies have

significant influence. This “significant influence” amounts to ownership of
at least 20% shares of the associate company.
The other company’s control can exist in terms of the associate company’s
business decisions under an agreement. Associate companies can also exist
under joint venture agreements.
Answer3:a) One Person Companies (OPC)

These kinds of companies have only one member as their sole shareholder.
They are separate from sole proprietorships because OPCs are legal entities
316
distinct from their sole members. Unlike other companies, OPCs don’t need
to have any minimum share capital.
b) Private Companies
Private companies are those whose articles of association restrict
free transferability of shares. In terms of members, private companies need
to have a minimum of 2 and a maximum of 200. These members include
present and former employees who also hold shares.
c) Public Companies
In contrast to private companies, public companies allow their members to
freely transfer their shares to others. Secondly, they need to have a minimum
of 7 members, but the maximum number of members they can have is
unlimited.
Answer4: The primary effect of forfeiture of Shares is that a defaulter

ceases to be a part-owner of this company whose share has been forfeited
due to delay or lack of payment. However, this does not clear a
shareholder of associated liabilities. A shareholder is still accountable to
paying his/her associated financial liabilities as due on the date of their
forfeiture.
The process of forfeiting shares starts with the company’s secretary,
making a list of the defaulters. The secretary places the list in front of the
board of directors and they issue instructions to send notice to all the
defaulters to pay the call money along with the interest within 14 days. If
the defaulters do not pay the due, a second notice is sent to them and if it
continues, their shares are forfeited in the next meeting.
Answer5: While accounting entries above have been explained with the
Forfeiture of Shares example, it is important to note these accounting
treatments mentioned below. Any of these adjustments are immediately
in effect while reversing the entries for forfeited Shares.
• The total called-up amount for a forfeited share(s) is debited from

its share capital account.
317
• This total called-up amount for Forfeiture of a share(s) is credited
to the relevant share Forfeiture account.
Vitally, these are in effect only when a shareholder or owner is unable to

clear their called-up amount. Companies typically provide a notice
period before a shareholder’s stocks are forfeited.
5.11 SOME USEFUL BOOKS
References book
• Shukla & Grewal, Advanced Accounting – S Chand
• P.C. Tulsian, Financial Accounting
• Financial Accounting for Management, Dr. S. N.Maheshwari,
Vikas Publishing House, New Delhi
• Fundamentals of Accounting & Financial Analysis: By Anil
Chowdhry (Pearson Education)
Textbook references
• Maheshwari, S.N., and S.K. Maheshwari; Advanced Accountancy,
Eighth Edition, Vol. I & II, Vikas Publishing House, 2003
• Financial Accounting: Fundamentals, Sultan Chand Publishers,
2003
• Financial Accounting for Management, Amrish Gupta, Pearson
Education
Website
• https://nptel.ac.in/courses/110/101/110101131/
• https://guides.loc.gov/history-of-accounting/electronic-resources
• https://huntertafe.libguides.com/accounting/eResources_database
5.12 TERMINAL QUESTIONS
1. Define joint stock company along with its characteristics

2. State some Privileges or Benefits of a Private Company
3. State a few Objectives of Final Account preparation
4. Give format of trading and profit and loss account
5. What is the Accounting Treatment for Forfeiture of Shares?
6. Explain Conditions for Issue of Shares at Discount
318
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Fundamentals of Accounting

UNIT – 5 COMPANY ACCOUNTS

After studying this unit, you will be able to:

• Discuss essential features of joint stock company

5.1 INTRODUCTION TO JOINT-STOCK

Company accounts are known as a memorization of an organization's

With the technological improvements, the scale of operations has

increased. The requirements for finances and managerial resources have

gone up. The traditional forms of organisation such as sole-proprietorship

in business volumes also brings in more liabilities. Under these

circumstances the company form of organisation developed as the most

In this form of organisation a large number of persons known as

shareholders join hands to start a bigger business and the liability of

Joint stock company form of organisation was first started in Italy in

limited liability was introduced only in 1857. A comprehensive companies

known as ‘companies’. The companies started under state or central

legislations are called ‘corporations’.

A company is “an association of many persons who contribute money or

money’s worth to a common stock and employ it in some trade or business,

“A Joint Stock Company is a voluntary association of individuals for

profit, having a capital divided into transferable shares, the ownership of

which is the condition of membership.” —Prof. L.H. Haney

“A corporation is an artificial being, invisible, intangible and existing only

in contemplation of the law. Being a mere creation of law, it possesses

“A company means a company formed an registered under this Act.”

— Section 3 of Indian Companies Act 1956

An analysis of above mentioned definitions brings out the following

1. A company is an artificial person under law.

2. It has separate legal entity than its members.

3. It possesses only those properties which have been conferred on it by

the charter of its creation.

4. It is a voluntary association of persons.

5. It is created to earn profits.

6. It has a capital which is contributed by the members.

7. The capital is divided into small parts known as shares.

8. The persons who own these shares are called members.

9. The shares of a company are easily transferable.

10. The capital of a company is employed for a common purpose.

On the basis of ownership the companies can be classified into

(i) It has a minimum of two members and a maximum of fifty members.

(ii) A private company restricts the rights of members to transfer their

(v) It has a minimum paid up capital of Rs. One lakh.

A private company is an ideal form of organization when a business is to

be expanded at a large scale without involving large number of

According to Section 31(1)((iv) of the Indian Companies Act, all

companies other than private companies are called public companies. It is

a company in which public at large is interested.

A public company has the following trait:

(i) It is formed with a minimum of seven members.

(ii) It invites general public to subscribe to its shares.

(iii) There is no restriction on the maximum number of members.

(iv) It permits the transfer of shares.

(v) Has minimum paid up capital of Rs. Five lakhs.

(vii) Before starting the business it requires a certificate of commencement

from the Registrar of Companies.

Privileges or Benefits of a Private Company:

A private company is given certain exemptions or privileges as compared

Some of the main privileges are as follows:

1. A private company can be started with just two members whereas a

public company required at least seven members.