BOOKS OF ACCOUNTS AND SHARE CAPITAL

MEANING OF COMPANY A company may be defined as an incorporated association which is an artificial person, having a separate legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares and carrying limited liability. It is called an artificial person because of its very nature that law alone can give birth to a company and law alone can put it to an end.

TYPES OF COMPANIES View of formation Chartered companies: incorporated under a special charter by the king or sovereign. Statutory companies :formed by a special act of the legislature or parliament. Registered companies: incorporated under the companies act 1956. View of liability Limited companies: liability of each member is limited to the extent of the face value held by him. Guarantee companies: liability is limited to the amount members have has undertaken to the assets os the company in the event of its wound up.

View of public investment Unlimited companies: members have unlimited liability and both there share contribution as well as their private property are at stake. View of public investment Private companies: a company which: Restricts the right to transfer its shares, if any. Limits the number of its members to 50 excluding past or present employees of the company who are also the members of the company. Prohibits an invitation to the public to subscribe for any shares or debentures of the company. prohibits any invitation or acceptance of deposits from persons other than its members, directors and their relatives.

Public companies: Companies which [a] is not a private company [b] has a minimum paid up capital of 5 lakhs

FORMATION OF COMPANY Company should be registered under companies act 1956 .The following documents are to be filed with the registrar of d joint stock companies of the state in which the registered office of the company is to be situated: Memorandum of association Articles of association Statement of nominal capital A list of directors Written consent of the directors Notice of address of the registered office Statutory declaration

TYPES OF SHARE CAPITAL Nominal or registered or authorized capital: amount of the capital with which the company is registered. Issued capital: that part of authorized capital which is offered to the public for subscription. Subscribed capital: that part of issued capital for which applications are received from the public. Called up capital: amount on the shares which is actually demanded by the company to be paid. Paid-up capital: the part of the called up capital which is offered and is actually paid by the member. Reserve capital: the portion of the share capital which has not been already called up and shall not be capable of being called up except in the event of winding up of the company.

SHARES vs. STOCK BASIS SHARE STOCK PAID UP fully paid up or partly paid up Fully paid up TIME OS ISSUE Issued when company is incorporated Cannot be issued under such circumstances TERMS OF ISSUE Cannot be issued in fractions Can be issued in fractions NUMBERING Are serially numbered Not numbered NOMINAL VALUE They have equal nominal value May be divided into unequal amounts REGISTRATION Are always registered May be registered or unregistered TRANSFER Not transferable by mere delivery Can be transferred by mere delivery

TYPES OF SHARES Preference shares: shares which enjoy the preferential rights as to dividend and repayment of capital in the event of winding up of the company over the equity shares. Cumulative preference shares: these are the shares in which the unpaid dividends are treated as arrears and can be forwarded to subsequent years. Such unpaid dividends on these shares go on accumulating and become payable after the profits of the company in the subsequent years. Non cumulative preference shares :They does not get any dividend for the year in which the company has earned profits and they cannot claim it in the next year during which period there might be profit. If it is not paid it cannot be carried forward. Redeemable preference shares: these are the shares in which the capital raised through their issue is to be paid back by the company to such share holders after the expiry of the stipulated period whether the company is wound up or not.

Participating or non preference shares : the preference shares which are entitled to share in the surplus profit of the company in addition to the fixed rate of preference dividend are called participating preference shares and those [preference shares which do not carry to write of share in excess profits are known as non-participating preference shares. Equity shares: the shares on which there is no fixed rate of dividend. They will get dividend and repayment of capital after meeting the claims of preference share holders.

BOOK BUILDING A technique used for marketing a public offer of equity shares of a company A way of raising more funds from the market. According to SEBI GUIDELINES 2000 A process by which demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination Of the quantum of such securities to be issued by means of a notice, circulars, advertisement, document or information memoranda or offer document.” OBJECT To arrive at a fair pricing of the issue which is supposed to emerge out of offers given by various large investors like mutual funds and institutional investors.

ADVANTAGES OF BOOK BUILDING it allows for price and demand discovery the cost of issue is much more than other traditional methods of raising capital the time taken for completing the entire process is much less that of normal public issue. the demand for shares in book building is known before the issue closes.

EMPLOYEES STOCK OPTION SCHEMES: The option given to the whole time directors, officers or employees of a company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price. Companies Amendment Act, 2000, new clause 15A in Section 2 of Companies Act 1956. EMPLOYEES STOCK PURCHASE SCHEME: It is scheme under which the company offers shares to its employees as part of a public issue or otherwise.

SWEAT EQUITY SHARES Equity shares issued at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions by whatever name called. A company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled: (a) The issue of sweat equity shares is authorized by a special resolution passed by the company in the general meeting. (b) The resolution specifies the number of shares, current market price, the consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued.

(c) Not less than one year has, at the time of issue, elapsed since the date on which the company was entitled to commence business. (d) The sweat equity shares of the company, whose equity shares are listed in a stock exchange, are issued in accordance with the regulations made by the Securities Exchange Board of India in this behalf.

JOURNAL ENTRIES FOR ISSUE OF SHARES (1) On receipt of application money Bank A/c Dr. To Share Application A/c (being the application money on …..shares @ Rs… per share) (2) On allotment of shares (a) Share Application A/c Dr. To Share Capital A/c (being the application money transferred to Share Capital A/c)

(b) Share Application A/c Dr (b) Share Application A/c Dr. To Bank A/c (being the application of shares returned) (3) Allotment money becoming due Share Allotment A/c Dr. To Share Capital A/c (being the share allotment money due on ….. Shares @ Rs…. per share as per resolution dated ….) (4) On receipt of allotment money Bank A/c Dr. To Share Allotment A/c (being the receipt of allotment money)

(5) To make the first call due from shareholders Share First Call A/c Dr. To Share Capital A/c (being the first call money due on …. Shares @ Rs…. per share as per resolution of the directors dated…….) (6) Receipt of the first call money Bank A/c Dr. To Share First Call A/c (being share first call money on ……shares @ Rs…. per share received) Similar entries are passed for second call, third call and final call, if any.

SECURITIES PREMIUM The purposes for which the securities premium account may be applied by the company are: For the issue of fully paid bonus shares to the members of the company. For writing off preliminary expenses of the company. For writing off the expenses of the commission paid or discount allowed on any issue of shares or debentures of the company. For providing premium payable on the redemption of any redeemable preference shares or debentures of the company For the buy-back of shares i.e. purchase of its own shares.

JOURNAL ENTRIES FOR ISSUE OF SHARES AT PREMIUM If the application is paid with application money: (1) Bank A/c Dr. To Share Application A/c (being share application money along with premium received) (2) Share Application A/c Dr. To Share Capital A/c To Securities Premium A/c (being application money transferred to share capital A/c and securities premium A/c)

(b) If the securities premium is received alongwith the allotment money: (1) Share Allotment A/c To Share Capital A/c To Securities Premium A/c (being the allotment money and securities premium money due on ….. shares) (2) Bank A/c Dr. To Share Allotment A/c (being the receipt of allotment along with share premium account) (c) If securities premium is to be received along with different calls, then it will be credited to Securities Premium Account at the time of passing the due journal entry.

DISCOUNT Shares cannot be issued at discount if: It is a new company Shares issued are of a new class even though issued by an old company.

JOURNAL ENTRIES FOR ISSUE OF SHARES AT DISCOUNT Share Allotment A/c Dr. Discount on Issue of Shares A/c Dr. To Share Capital A/c (being shares issued at a discount)

FORFEITURE OF SHARES When a shareholder fails to pay calls, the company, if empowered by its articles, may forfeit the shares. Forfeiture of shares brings about compulsory termination of membership and the company takes away the shares from member by way of penalty for non payment of allotment and/or call money.

JOURNAL ENTRIES FOR THE FORFEITURE OF SHARES Share Capital A/c Dr. Securities Premium A/c Dr. To Unpaid Calls A/c To Discount on Issue of Shares A/c To Shares Forfeited A/c (being shares forfeited)

REISSUE OF FORFEITED SHARES (1) Bank A/c Dr. Discount on Issue of Shares A/c Dr. Shares Forfeited A/c Dr. To Share Capital A/c To Securities Premium A/c (being reissue of forfeited shares) (2) Shares Forfeited A/c Dr. To Capital Reserve A/c (being profit on reissue of shares transferred to capital reserve)

FORFEITURE OF SHARES IN CASE OF OVER SUBSCRIPTION AND PRO RATA ALLOTMENT Following procedure is adopted in such a case: Total number of shares applied for on the basis of allotted shares is calculated. Total amount received on application is calculated by multiplying the number of shares applied with application money from the total money receivable on application. Deduct the amount due on application and allotted shares and balance is calculated. Amount due on such shares is calculated. Deduct the amount already received as advance on application. Amount in arrears on allotment is obtained and credited to share allotment a/c at the time of forfeiture of shares.

EMPLOYEE STOCK OPTION PLAN(ESOP) Right to an employee to purchase the shares of a company at a predetermined price. Employee includes: permanent employee of the company working in India or out of India or a director of the company or an employee of a subsidiary or a holding company of the company. employee is required to exercise the option of purchase of shares within investing period, i.e. within the time in which the scheme remains in operation. Shares issued under this scheme shall have locked in period of one year from the date of allotment.

ILLUSTRATION Mukesh Finance Ltd. Issued for public subscription 50,000 equity shares of Rs.10 each at a premium of Rs.2 per share as follows: On application Rs.5 per share, On allotment Rs.3 per share including premium On first call Rs.2 per share On final call Rs.2 per share. Applications were received for 80,000 shares. Allotment was made on the following basis: To applicants for 10,000 shares in full To applicants for 50,000 shares 30,000 shares. To applicants for 20,000 shares 10,000 shares. All excess money paid on application was to be adjusted against amount due on allotment and calls.

All the money except the following was received: (a) Sanjay (out of group applying for 50,000 shares) to whom 300 shares were allotted, failed to pay the two calls. (b) Pramod (out of group applying for 20,000 shares) who applied for 400 shares failed to pay the final call. All the shares on which calls were not paid were fortified by the directors. Of the shares forfeited 400 shares were reissued as fully paid to Mr. Milind for Rs.9 per share, the whole of Sanjay’s shares being included. Pass the necessary journal entries in the books of the company.

In the books of Mukesh Finance Ltd. JOURNAL ENTRIES SOLUTION DATE PARTICULARS LF DEBIT AMOUNT CREDIT AMOUNT Bank A/c Dr. To Share Application A/c (being application money received) 4,00,000 Share Application A/c Dr. To Share Capital A/c To Share Allotment A/c To Calls in Advance A/c (being adjustment of share application amount) 2,50,000 1,20,000 30,000 Share Allotment A/c Dr. To Securities Premium A/c (being allotment amount due 1,50,000 50,000 1,00,000 Bank A/c Dr. (being balance of allotment money received) In the books of Mukesh Finance Ltd. JOURNAL ENTRIES

Share First Call A/c Dr. To Share Capital A/c (being 1st call money due) 1,00,000 Bank A/c (1) Dr. Calls in Advance A/c Dr. To Share First Call A/c (being receipt of balance of call money) 69,500 30,000 99,500 Share Final Call A/c Dr. (being the amount of final call due) Bank A/c Dr. Calls in Advance A/c Dr. To Share Final Call A/c (being receipt of final call) Share Capital A/c(500 x Rs.10) Dr. To Shares Forfeited A/c (being forfeiture of shares) 5,000 500 1,000 3,500

Bank A/c Dr. Shares Forfeited A/c Dr. To Share Capital A/c (being reissue of forfeited shares) 3,600 400 4,000 To Capital Reserve A/c (being profit on reissue of forfeited shares transferred to Capital Reserve A/c) 2,300

WORKING NOTES: (1) Pro rata calculations for Mr. Sanjay and amount received on first call No. of shares allotted=300 shares No. of shares applied=500 shares Amount received on application(500 x Rs.5) =Rs 2,500 Less:Amount due on application(300 x Rs.5)=Rs.1,500 Excess application money to be adjusted on allotment =Rs.1,000 Less:Amount due on allotment =Rs. 900 first call =Rs. 100 Amount due on first call =Rs. 600 Less:Excess application adjusted =Rs. 100 Not received on first call =Rs. 500 Amount received on first call = Rs.1,00,000-Rs.30,000-Rs.500 =Rs.69,500

(2) Calculation Table: No. of shares applied for Amount received on application No. of shares alloted Amount due on application Balance Amount due on allotment Amount due on first call Amount due on final call Rs. 10,000 50,000 20,000 2,50,000 1,00,000 30,000 1,50,000 - 90,000 60,000 80,000 4,00,000

(3)Calculation of Capital Reserve A/c: Amount received from Sanjay(Rs (3)Calculation of Capital Reserve A/c: Amount received from Sanjay(Rs.2,500-Rs.600) 1,900 Proportionate amount on 100 shares of Pramod (Rs.2,000-Rs,400)/2 800 2,700 Less : Loss on reissue of forfeited shares 400 Capital reserve A/c 2,300