01 · Explore
Nature and Features of a Company
A company is a voluntary association of persons who contribute money to a common stock for a common purpose. It is the third stage in the evolution of business organizations.
According to Chief Justice Marshall, a company is an artificial person, invisible, intangible, and existing only in the eyes of law. It is a legal entity distinct from its members, meaning it can own property, enter into contracts, and sue or be sued in its own name.
Key features include Perpetual Succession, where the company's existence is unaffected by the death or insolvency of members. It also possesses a Common Seal, which acts as its official signature. The liability of members is generally limited to the unpaid amount on the shares they hold.
Companies are classified by liability (Limited by Shares, Limited by Guarantee, or Unlimited) and by the number of members (Public, Private, or One Person Company). A Private Company restricts share transfers and limits its members to 200, excluding its employees. A One Person Company (OPC) is defined under Section 2(62) as having only one person as a member.
Specific rules for an OPC include: only a natural person who is an Indian citizen and resident can form it; it cannot carry out non-banking financial investment activities; its paid-up share capital must not exceed Rs. 50 Lakhs; and its average annual turnover of three years must not exceed Rs. 2 Crores.
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Why is a company called an 'artificial person'?
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What are the membership limits for a Private Company?
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02 · Explore
Categories of Share Capital
Share capital refers to the amount contributed by shareholders. For accounting purposes, it is divided into several categories based on its status in the issue process.
Authorised Capital (or Nominal/Registered Capital) is the maximum amount a company is authorized to raise by its Memorandum of Association. Issued Capital is the portion of authorized capital actually offered to the public for subscription.
Subscribed Capital is the part of issued capital for which the public has applied. This is further divided into 'Subscribed and fully paid-up' (when the full face value is called and paid) and 'Subscribed but not fully paid-up' (when the company hasn't called the full amount or a shareholder hasn't paid).
Called-up Capital is the amount the company has asked shareholders to pay. Paid-up Capital is the actual amount received. Reserve Capital is a portion of uncalled capital that the company decides to call only in the event of winding up.
Hierarchy of Share Capital
- 1
Authorised Capital
Maximum limit specified in the Memorandum of Association.
- 2
Issued Capital
Part of authorised capital offered to the public.
- 3
Subscribed Capital
Part of issued capital actually taken up by the public.
- 4
Called-up Capital
Amount requested by the company from the subscribers.
- 5
Paid-up Capital
Actual amount received from shareholders (Called-up minus Arrears).
This sequence shows how capital flows from the legal maximum limit down to the actual cash received by the company.
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Define Reserve Capital.
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03 · Explore
Nature and Classes of Shares
A share is a fractional part of the total share capital and forms the basis of ownership interest in a company.
Under Section 43 of the Companies Act, 2013, a company can issue two types of shares: Preference Shares and Equity Shares. Preference shares carry a preferential right to receive dividends at a fixed rate and the repayment of capital before equity shareholders in case of winding up.
Equity shares (or ordinary shares) do not enjoy these preferential rights. Equity shareholders are entitled to the remaining profits after preference dividends are paid. They usually carry voting rights and bear the ultimate risk and rewards of the business.
| Feature | Preference Shares | Equity Shares |
|---|---|---|
| Dividend Rate | Fixed rate | Fluctuates with profits |
| Priority of Dividend | Paid before equity shares | Paid after preference shares |
| Repayment of Capital | Priority during winding up | Paid last |
| Voting Rights | Usually no voting rights | Full voting rights |
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What are the two main conditions for a share to be classified as a Preference Share?
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04 · Explore
Accounting for Issue of Shares
The process of issuing shares involves inviting the public through a prospectus, receiving applications, and then allotting shares to the applicants.
When a company receives application money, it is initially credited to a 'Share Application Account'. Upon allotment, this money is transferred to the 'Share Capital Account'. If the company receives more applications than offered (Over-subscription), it may reject some or make a pro-rata allotment.
The amount on shares can be collected in installments: Application, Allotment, First Call, and Final Call. Legal limits apply to these calls: the amount on any call should not exceed 25% of the face value, and there must be an interval of at least one month between two calls unless provided otherwise by Articles.
Minimum Subscription is a legal requirement where a company must receive at least 90% of the issued amount. The company must receive this within 120 days from the date of prospectus issue. If it fails, application money must be returned within 130 days. If a delay occurs beyond 8 days from the closure of the subscription list, the company is liable to pay interest at 15% p.a.
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What is the interest rate for delayed refunds of application money?
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05 · Explore
Calls in Arrears and Calls in Advance
Discrepancies often arise when shareholders fail to pay due amounts or pay amounts before they are called.
Calls in Arrears occurs when a shareholder fails to pay the amount due on allotment or calls. The company can charge interest on these unpaid amounts (not exceeding 10% p.a. as per Table F). In the Balance Sheet, Calls in Arrears is deducted from the Subscribed Capital.
Calls in Advance occurs when a shareholder pays part or all of the uncalled amount. This is treated as a liability for the company and shown under 'Other Current Liabilities'. The company pays interest on this amount (not exceeding 12% p.a. as per Table F) until the actual call date.
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How is 'Calls in Arrears' shown in the Balance Sheet?
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06 · Explore
Issue of Shares at a Premium
When shares are issued at a price higher than their face value, the excess amount is called Securities Premium.
The premium amount is credited to the 'Securities Premium Reserve Account'. This account is shown under 'Reserves and Surplus' in the Balance Sheet. It is important to note that this premium is not a regular profit and its usage is strictly restricted by Section 52(2) of the Companies Act, 2013.
Permitted uses of Securities Premium include: (a) issuing fully paid bonus shares; (b) writing off preliminary expenses; (c) writing off commission or discount on issue of securities; (d) providing for premium on redemption of preference shares or debentures; and (e) purchase of its own shares (buy-back).
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List the five permitted uses of the Securities Premium Reserve.
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07 · Explore
Forfeiture of Shares
If a shareholder fails to pay the due calls, the company may cancel their shares and forfeit the amount already paid.
Forfeiture involves debiting the 'Share Capital Account' with the total amount called-up so far on those shares. The 'Share Forfeiture Account' is credited with the amount already received (excluding premium if already received). Unpaid call accounts are credited to cancel their debit balances.
If shares were issued at a premium and the premium was not received, the 'Securities Premium Reserve Account' must also be debited at the time of forfeiture to reverse the earlier credit entry. If the premium was already received, it is not reversed.
The balance in the Share Forfeiture Account is shown as an addition to the paid-up capital in the Balance Sheet until the shares are reissued.
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What happens to the Share Capital account when shares are forfeited?
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08 · Explore
Reissue of Forfeited Shares
Forfeited shares become the property of the company and can be reissued at par, premium, or even at a discount.
When forfeited shares are reissued at a discount, the amount of discount is debited to the 'Share Forfeiture Account'. Crucially, this discount cannot exceed the amount previously forfeited on those specific shares.
After reissue, any remaining credit balance in the Share Forfeiture Account (representing the net gain on those reissued shares) is transferred to the 'Capital Reserve Account'. This is because the profit on reissue is a capital profit.
If only a portion of the forfeited shares are reissued, only the proportionate profit relating to the reissued shares is transferred to the Capital Reserve. The remaining balance stays in the Share Forfeiture Account.
Transfer to Capital Reserve
Capital Reserve = (Amount Forfeited on Reissued Shares) - (Discount on Reissue)
If Rs. 600 was forfeited on 200 shares (Rs. 3 per share) and they are reissued at a discount of Rs. 1 per share (Total discount Rs. 200), the profit transferred to Capital Reserve is 600 - 200 = 400.
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What is the maximum discount a company can allow on the reissue of forfeited shares?
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Where is the profit on the reissue of forfeited shares transferred?
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