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Introduction

In corporate accounting , commerce students have to learn accounting treatment of issue of share
capital , debenture and its redemption , bonus and right issue at graduation level . They also have to
solve the problems of final accounts of different companies . For proper accounting treatment ,
learning of Indian Company Law 1956 is must . So , this topic is being discussed here. If you are
starting to learn Company or Corporate Accounting , then this article will be useful for you because
after reading this article , you will understand , the brief history , meaning , definition of Company
and its six features .
History
First of All, in France this word was used for body of soldiers see [Fr. Term Compaignie].. After year
1500, this word became famous in business. Group of businessmen was called company.
Example
I can explain the meaning of company with a simple example. Suppose, two persons want to do
business at large scale but they have limited money. They are also not interested to
make partnership due to its unlimited liability. They go to the office of registrar of companies and fill
the form of creation of company and attaching required documents. They also pay the required fees.
After this, registrar will register their company. This registered company will be independent Identity.
Definition of Company
Indian Company law 1956s section 3(1) (i) define company, Company is the organisation which is
formed and registered under this law or any previous law
Explanation of Company
From above example and definition, we can understand that company is voluntary and autonomous
association of persons. This is made for achieving business objectives. It acts like human being.
Company can purchase assets or sell it. It can take also debt. It can open bank account. It is fully
free from its members. Company is operated through board of directors.
Company vs. Corporation
There is no solid difference between Company and Corporation. But , these days Corporation word
is mostly used in finance area because this word is most popular in USA economy . Media is also
publishing all stories of Industries by using Corporation as keyword in India. All features of Company
like a separate legal entity having its own rights, own property , sign binding contracts , privileges,
and liabilities distinct from those of its members can be seen in Corporation .
Features of Company:1. Separate legal entity

It is the feature of company that company is not just association of persons but it has separate legal
entity. It is an artificial person in the eye of law. Its asset is not the asset of shareholder. It can
contract with members. This feature was firstly accepted in Salomon vs Salomon and Company ltd.
Salomon was the dealer and manufacturer of leather boot and shoe. He had a wife, a daughter and
other five sons. He sold his business to Salomon and company ltd which he made himself he also
made his family as its shareholder. His wife, daughter and his other four sons purchased one share
of this company and rest, he purchased. He purchased 20000 shares and 10000 shares. After
one, due to economic trouble and other reasons business failed and the company was put into
liquidation. At that time financial position of company was
Assets 6000
Debentures 10000
Unsecured Creditors 7000
External creditors demanded their money because Solomon and Solomon Company were both one
person and this business was of Solomon and it was being operated by him. It was a fraud. But
The House held:
"Either the limited company was a legal entity or it was not. If it were, the business belonged to it and
not to Mr. Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is
impossible to say at the same time that there is a company and there is not."
The House further noted:
"The company is at law a different person altogether from the [shareholders] ...; and, though it may
be that after incorporation the business is precisely the same as it was before, and the same
persons are managers, and the same hands received the profits, the company is not in law the
agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any
shape or form, except to the extent and in the manner provided for by the Act."
In end court decided that Solomon and company are different from Solomon and Solomon is
secured creditor. So his given loan should be returned first.
2. Separate Property
It is also feature of company that property of company is different from its members. It can purchase
or sell property without the permission of shareholders. In other words, assets of company are not
the assets of members like partnership.
3. Limited Liability
Limited liability is also another important feature of company. It is the reason that large number
of investors invest in limited liability companies. It is the liability of company to repay not the liability
of its members. Members liability is only limited up to the purchased value of shares. They have to
pay balance amount of their shares.
4. Perpetual Succession
The life of company is very stable that human beings life. There is no effect of changing, death,
insolvency of respected member on company. Its existence is not affected by members existence.
Shares can easily transfer from one member to another member, so liquidation of company is only

possible by law.
5. Common Seal
Company can not sign on any contract because it is artificial person and it works with common seal.
Every document of contract with company is only valid, if there is common seal of company on it.
6 Right to Sue
Company can sue on other parties like natural person for protecting its assets and properties. Other
persons can also charge on the company.
it is true that no business can operate without fund and fund can be received only by capital or loan .
If company or corporate wants to get capital , it should make some division for this purpose. After
this shares can be issued first time to public . For company accountant , its knowledge is must .

We can explain main divisions of share capital of company with following way :-

1st - Registered or authorised or nominal capital

That part of total capital with whom company wants to register , that part is called authorised capital .
This the maximum amount that can any company issue to public for getting capital fund . Still there
is not quantity limit for authorised capital determination under Indian Company Act 1956 .

2nd Issued Capital

It is that part of authorised capital which is offered to public to acquire , that part is called issued
capital .

3rd Subscribed Capital

It is that part of issued capital which is accepted by public. Subscribed capital can not more than
issued capital . If it happen than it will be over subscription and it will be rejected or accepted under

pro-rata basis for providing proper accounting treatment .

4th Called up Capital

It is that part of issued capital which is to be paid by shareholders . Company has demanded money
of this part . If shareholder does not pay called up capital , then this part becomes call in arrears .

5th Paid Up capital

It is that part of called up capital which is paid by shareholders and after this they can become real
owner of company.

6th Reserve capital

One company can determine with special resolution that some part of total subscribed capital will not
demanded from shareholder and it is not demand up to the winding up of company . That part of
capital is called reserve capital . It can not be changed in general capital with the permission of Court
. Board of directors also can not change it in normal capital . It is most benefited for company's
creditors . because , this amount can be utilized for payment to creditors at the time of liquidation of
company.
There is no need to do any accounting treatment for reserve capital but a small note is written in
balance sheet in which company mentions the amount of reserve capital and other interested parties
can focus on this note .

For instance

A company has Rs. 20000000 as its authorised capital divide into 1000000 equity shares of Rs. 10
each and 200000 pref. shares of Rs. 50 each. Company issued 800000 equity shares and 100000
preference shares . The public subscribed for 600000 equity shares and 100000 pref. shares . All

shareholders paid the amount with the exceptionof 50000 equity shares @ Rs. 5 per share .
Calculate the amount of various types of share capital .

Authorised capital

1000000 equity shares of Rs. 10 each Rs. 10000000


200000 pref. shares of Rs. 50 each Rs. 10000000
___________________________________________
---------------------------------------> Rs. 20000000
___________________________________________
Issued Capital
800000 Equity shares of Rs. 10 each Rs. 8000000
100000 pref. share of Rs. 50 each Rs. 5000000
__________________________________________
----------------------------------------> Rs. 13000000
__________________________________________
Subscribed capital
600000 equity shares of Rs . 10 each Rs. 6000000
100000 pref. share of Rs. 50 each Rs. 5000000
___________________________________________
---------------------------------------> Rs. 11000000
___________________________________________
Called up capital
600000 equity shares of Rs. 10 each
Called up only Rs. 8 per share Rs 4800000
100000 pref. shares called up @ Rs. 40 each Rs. 4000000
____________________________________________
------------------------------------------------> Rs. 8800000
____________________________________________
Paid up capital
Called up equity capital less calls in arears
of Rs. 5 each -------------------------------- Rs. 4550000
paid up capital of pref. shares --------------- Rs. 4000000

_____________________________________________
----------------------------------------------> Rs. 8550000
Shareholders or stockholders are the persons or firm or companies who purchase the shares of
other company. They are the real owner of company. Shareholders may be preference shareholders
or equity shareholders.

Equity shareholders can vote in annual general meeting for passing


any resolution. Other side Preference shareholders have preference to get dividend with fixed rate
before giving dividend to equity shareholders. All shareholders have to open demat account if they
want to deal in shares. We have already told you that shareholders are the real owner of company, it
means if company suffers loss then shareholders have no right to get dividend. If company is
liquidated, then they can receive their money only after paying external creditors and debenture
holders.
Company has to maintain good relation with shareholders and try hard to bring high rate
on capital which is given in the form of shares because every shareholder wants to increase
his share capital.
Shareholders have to maintain their contact with different company because they are interested
to invest their hard earned money in that place from where they can get high ROI. They have to
check the past records from companys financial statements before investing their money. If any
company wants to encourage shareholders, then it has to maintain fair and reliable financial
statements and show evidence of its best performance with financial statements.
Rights of Shareholders
1. To transfer the shares
2. To get information of meeting of company, take part in it and Vote.
3. To check the registers and copies of receipts and take copies.
4. To take the copies of memorandum of association and article of association.
5. To receive right shares.
6. To obtain annual reports, auditors report, profit and loss account and balance sheets copies.
7. To sign the proposal of liquidation which is done by Court.
8. To take part in the committee for appointment of liquidator at the time of voluntary liquidation of
company.
Shareholders Vs Members
All registered shareholders are members of company but all registered members may not be
shareholders because some companies establish without share capital.
Shareholders Vs Brokers
All shareholders may not be brokers but all brokers may be shareholders because brokers have right
to deal in share market. If they purchase the shares on the behalf of their customers, they are only

brokers not shareholders of company. But due to representing shareholders in share market, they
can use some powers of shareholders while they deal.
Shareholders Vs Stockholders
If shareholders purchase shares in sets form, then they are said stockholders.
Shareholders Vs Stakeholders
Shareholders may be stakeholders, but stakeholders may be shareholders or may not. Stakeholders
are the persons who are affected by that company's operations - including its shareholders, but also
its bondholders, managers, workers, retired workers, suppliers, customers, and the communities
where it operates.

Issue of Shares at Par


2 Vinod Kumar June 26, 2013

When company issues the shares, it has to fix the price of per share. If the face value and issue
price per share will equal, then it is called that shares have been issued at par. Issue price will not
always equal to the face value per share. If issue price is more than face value, then shares will
be issue at premium. If issue price is less than face value, then shares will issue at discount.

In simple word, if you want to understand the issue of shares at par, you have to understand the face
value of per share. Concept of face value came from currency. In the beginning of time, we used
Gold Currency. Because Gold was cheap. Market fixed the price of Gold and printed $ 1 on the Gold
Coin. It was its face value, but after sometime, Gold's price increased. Same 1$ Gold Coin's value
became 200 $ current paper currency. Still face value of 1 $ Gold coin is $ 1 but market value is
different. Like this, each share's face value is fixed by company and other outside factors. When it
fixes, a company can issue his share on this price or less than this price or more than this price. If
face value per share and issue price per share will equal then it will be issue of share at par.
In accounting treatment, when we see par value. For example, it is $ 100. Now, classify this money
in application money, allotment money and call money. For example, we have to take $ 50 at the
time of application. It will be application money. If we have to take $ 25 per share at the time of
allotment of shares, we will say it allotment money per share. If we have to take balance in call, then

balance $ 25 per share will be call money.


We can also say the issue of shares at par as issue of shares at stated value or at nominal value. If
shares are issued at premium or at discount, but both will not become the part of share capital. We
will open the stock premium account if shares are issued at premium. Same premium is used for
written off the capital losses.
Like this, we will open discount on issue of share account when shares are issued on discount.
Same discount is shown as dead asset and written off with premium.

Accounting Treatment of issue of


shares on premium and discount
5 Vinod Kumar October 31, 2008

Some time a company can decide to issue of shares on premium or on discount. In both situations
we must know the basic concept before doing any accounting treatment.
Issue of shares on premium
Issue of shares on premium means that if company wants to get more money of each share. Then
the company can demand premium with the face value or nominal value of shares. This is called
issue of shares on premium. Suppose if the face value of shares is RS.100 Company can issue of
his 10000 @ Rs. 105 it means company is also demanding RS. 5 per share as premium. According
to new amendments in Company law 1956, Company must open security premium account, if co.
issue shares on premium. All money which got with name of premium will transfer to security
premium account . The following entry will passed in the books of company

For the due of share Allotment money


1.
Shares Allotment Account Debit xxxx ( with the total amount )
Shares Capital Account Credit xxxx ( With the face value of shares)
Security Premium Account Credit xxxx( With the amount of premium)
2. For Allotment money Received
Bank Account Debit xxxx ( face value + Premium )
To Share Allotment Account xxxx
If company has demanded the premium with his call money from share holders , then on the place
share allotment account we must write share call account , all other journal entry will be same.
According to Section 78 , We will use this fund according to guidelines of law.
Meaning of Issue of shares at discount :It means that company demands less amount than face value of shares .This less amount is called
discount on issue of shares .
Journal entry of discount on issue of shares
When we receive allotment by giving discount on issue of share
1 Amount due of allotment
Share Allotment Account Debit xxxx( face value of allotment discount)
Discount on issue of share account Debit xxxx( amount of discount)
To Share capital account
2. When allotment money actually received
Bank account debit xxx( face value of allotment discount)
To share allotment account

Accounting Treatment of issue of


shares on premium and discount
5 Vinod Kumar October 31, 2008

Some time a company can decide to issue of shares on premium or on discount. In both situations
we must know the basic concept before doing any accounting treatment.
Issue of shares on premium
Issue of shares on premium means that if company wants to get more money of each share. Then
the company can demand premium with the face value or nominal value of shares. This is called
issue of shares on premium. Suppose if the face value of shares is RS.100 Company can issue of
his 10000 @ Rs. 105 it means company is also demanding RS. 5 per share as premium. According
to new amendments in Company law 1956, Company must open security premium account, if co.
issue shares on premium. All money which got with name of premium will transfer to security
premium account . The following entry will passed in the books of company
For the due of share Allotment money
1.
Shares Allotment Account Debit xxxx ( with the total amount )
Shares Capital Account Credit xxxx ( With the face value of shares)
Security Premium Account Credit xxxx( With the amount of premium)
2. For Allotment money Received
Bank Account Debit xxxx ( face value + Premium )
To Share Allotment Account xxxx
If company has demanded the premium with his call money from share holders , then on the place
share allotment account we must write share call account , all other journal entry will be same.
According to Section 78 , We will use this fund according to guidelines of law.

Meaning of Issue of shares at discount :It means that company demands less amount than face value of shares .This less amount is called
discount on issue of shares .
Journal entry of discount on issue of shares
When we receive allotment by giving discount on issue of share
1 Amount due of allotment
Share Allotment Account Debit xxxx( face value of allotment discount)
Discount on issue of share account Debit xxxx( amount of discount)
To Share capital account
2. When allotment money actually received
Bank account debit xxx( face value of allotment discount)
To share allotment account

Accounting for Share Capital


Transactions
0 Vinod Kumar January 14, 2013

For a company, share capital is the main source of fund. So, when company gets share capital, it is
very necessary to record it in the books. To know basics of accounting for share capital transactions
is still important for every accountant because today most of companies are limited by shares. Every
shareholder's liability is limited up to his bought shares.

Today, we will start accounting for share capital with following transactions :
(A) Journal Entries of Share Capital Transactions
1. When company gets Application Money
For doing business, company need big money. Company issues the prospectus during initial public
offering. All the person who satisfied with company's written terms and objectives in the prospectus,
may apply for getting shares. This is the first transaction which is done between the investor and
company. After this, company will not record when one shareholder sells the shares to other
shareholder because in the year, a company's shares may be transferred from millions of people to
other millions of people. In the end, company will make shareholder register to record the current
shareholders.
Important : Because company is not getting full amount from shareholder. So, company divides total
receivable money in the share application, share allotment and balance in share calls.
Ok, come to learn when company gets application money.
Bank Account Dr.
Share Application Account Cr.
Explanation of this Transaction :
Company gets liquid asset, so bank account will debit. Share application is the creditor account
which we will transfer to share capital account allotment of shares to shareholders.
2. Transfer the Share Application to Share Capital Account on the Allotment of Shares
Allotment means physical transfer of shares from company to investor. After this, a investor will
become the owner and shareholder of company. Before this, he is just a creditor. All the application
money will be transfer to the investor to whom we did not allot the share. It may happen due to more
application than our demanding quota of application which depends on our issued capital.
Share Application Account Dr.

Share Capital Account Cr.


Explanation of this Transaction :
Application money on allotted shares is transferred to share capital account. In simple words, we
have transfer current liability into our fixed liability.
3. On the Return of Application of Not Allotted Shares
Share Application Account Dr.
Bank Account Cr.
Explanation of this Transaction :
The investor has right to get his invested money if company do not give shares. Company is just
passing the opposite entry of no. 1 for returning application money to the applicants who could not
be allotted any share.
4. When Allotment Money Becomes Due
Share Allotment Account Dr.
Share Capital Account Cr.
Explanation of This Transaction :
If company gets all the money from applicants in one installment, company just debits the bank
account and credits the share capital account but because we are receiving money in different parts,
so, when company has fixed the date when company has to get allotment money from shareholder,
company will transfer it to share capital account. Normally, at the date of allotment of money and
allotment due dates will be same.
5. When Company Receives Allotment Money

Bank Account Dr.


Share Allotment Account Cr.
6. When Call Money Becomes Due
Share Call Account Dr.
Share Capital Account Cr.
7. When Company Receives Call Money
Bank Account Dr.
Share Call Account Credit
Explanation of 6th and 7th Transaction :
Company may get call money in 1st call, 2nd call and final calls. So, when and which call money will
be due, we will transfer this call money to share capital account. When call money will receive, we
will debit the bank account and credit the share call account.
(B) Books of Share Capital Transactions
Company records every applicant's record relating to share capital transaction. This is done through
share application and allotment book and share call book. Following is the sample of application and
allotment book. With same format, you can also make share call book.

Application No.
1
2
3
Date of Application
5/1/2013
5/1/2013
5/1/2013
Name of Applicant
A
B
C
Address
Delhi
Mumbai
Kolkata
Occupation
Doctor
Accountant Engineer
No. of Shares Applied for
5000
3000
2000
Amount Paid on Application Rs. 250,000 Rs. 150,000 Rs. 100,000
C.B. Folio

4
5/1/2013
D
Chennai
House Wife
40000
Rs. 200,000

Distincitve No.
Allotment Letter No.
Amount Due on Allotment
Date of Receipt of Cash
Allotment Money
C.B. Folio
Amount of Cash Returned
C.B. Folio
Member's Register No.
Remark

ad45
ad46
ad47
Rs. 250,000 Rs. 150,000 Rs. 100,000
15/1/2013 15/1/2013 15/1/2013
Rs. 250,000 Rs. 150,000 Rs. 100,000

VVVV7

VVVV8

VVVV9

ad48
Rs. 200,000
15/1/2013
Rs. 200,000

VVVV10

(C) Record of Share Capital Transactions in Balance Sheet


Only Paid up capital will be the part of balance sheet and will be shown in the liability side because
same amount will be shown as cash at bank in the asset side of balance sheet. Following is its
example.

You are seeing Rs. 6000 call in arrears. For showing call in arears, you have to investigate whether
all the money which is due, has been received or not. If any money which is due but not receive will
add in call in area. For showing it in balance sheet, we pass following entry.
Call in Area Account Dr.
First or any Share Call Account Cr.
Important for Students : {This Written Lecture is the Part of CS Accounting Notes for ICSI Students
and Corporate Accounting Notes for Graduate and Post-Graduate Students. }

Deep study Of Accounting


Treatment of Share Forfeiture and
reissue of share forfeiture shares:1 Vinod Kumar November 6, 2008

Sorry , For not writing some time due to busy for writing my thought . So today I am writing new for
you
Definition of share forfeitures
Share forfeitures means cancel the power of share holder if he does not pay his call money when
company demands for this .Company will give 14 days notice, after 14 days if shareholder did not
pay then company will forfeit his shares and cut off his name from the register of shareholder.
Company will not pay his received fund from shareholder.
Deep accounting treatment is divided in following parts

1st situation
Simple accounting treatment
In this situation shares issue at part and there is no pro-rata situation. So the following entry will pass

Share capital Account Debit (called up amount of forfeited shares


Share forfeited Account Credit (Amount received of forfeited shares)
Share call in arrear Account Credit (Amount did not receive of forfeited shares)

2nd Situation
When shares issue on discount and premium
Dear friend if shares are issue on premium or on discount, then if we did not receive the premium,
then we write in journal entry otherwise we will not show security premium account in share forfeiture
journal entry
Share capital Account Debit (called up amount of forfeited shares)
Security premium account Debit (If premium is not received from share holder)
Share forfeited Account Credit (Amount received of forfeited shares)
Share Allotment Account Credit (If allotment money is not received)
Share call in arrear Account Credit (Amount did not receive of forfeited shares)
In case shares are issued on discount
Share Capital Account Debit
Share Forfeiture Account Credit
Share Allotment Account Credit
Share call in arrear account credit
Discount on issue of shares account credit

3rd situation
When shares issue pro-rata base
In case there is also difficulty to calculate the net amount of allotment received in case some amount
is not received and same person we have adjust some amount of share application.
Calculate the net amount of allotment received
Total amount of allotment money due xxxxxx

Less Adjustment with application


Money xxxxxx
_________________
Xxxxxx
Less Amount not received
As forfeited shares
Xxxxxxx
Less (-) xxxx
Perportion in
Not received amount
Of adjusted application
Money which is
We received in advance
Total not receive allotment
= ------------------------------- x Total adjustment of application money
Total Allotment money
________________________________
Net amount not received
In the form of allotment xxxxxxx (-) xxxx
______________________________ ____________
Net Amount received in the form of
Allotment xxxxx
The following journal entry will passed
Share capital account Debit (Called up capital)
Share forfeiture Account Credit (Total Amount received of forfeited shares)
Share Allotment Account Credit (Net amount not received in the form of allotment, for calculation of
this amount you must understand and use above formula)
Share Call in Arrear Credit (if you are not received any call money of share forfeited)

4th situation
When shares fully reissue
Reissue means sale to any other person after forfeiting from previous share holder.
In this situation we can reissue of share in discount or premium. For doing this we have to pass the
following journal entry
Bank Account Debit
Discount on issue of shares Debit
Share forfeiture account Debit (Discount on reissue of shares)
Share capital account Credit (Face value of reissue of shares)
Security premium Account Credit (If shares reissue at premium
So difference between amount received from forfeiture and discount on reissue share will go to
capital reserve account and following entry will passed
Share forfeited account Debit
Capital reserve account credit
This capital reserve account will show in liability side of balance sheet of company.

5th situation
When Shares partly reissue
It is most difficult situation when you will see the question paper and you found the sum where is
pro-rata situation , then share holder did not pay and then these forfeited shares party reissue to
another share holder because
Above 4 situations will cover but in the 4th situations last journal entry will pass after making
forfeiture account in working note because only the amount go to capital reserve which is sold or
reissue gain other will go to balance of share forfeiture account upto that date until we reissue all
shares.
Share forfeiture Account
Credit Side of this account
By share capital Account 2000
Suppose we get 100 shares forfeiture money received

Rs,20 per share


_________
2000
________ _
Debit Side of this account
To share capital account 250
Suppose we have reissue of 50 shares at reissue discount Rs.5
To capital Reserve account
We will calculate this amount after deducting the proportion of of this gain according to sold shares
2000 x 50/100 250 = 750
To balance C/d 1000
_____________________________
2000
Then following journal entry will pass
Share forfeiture account Debit 750
To capital Reserve Account Credit 750

Forfeiture and Reissue of Shares


Journal Entries
0 Supporter September 22, 2015

Today, we are taking an important example for explaining the journal entries of forfeiture and reissue
of shares. But before study this, you should study our past corporate Accounting study material
which will clear you the fundamental of Forfeiture and Reissue of Shares accounting.

First read below and then use browser of web or mobile back button to reach here again.

Accounting Treatment of Forfeiture and reissue of share

Why is Share Forfeiture Account Debited, When It is Reissued at Discount?

A Ltd. issued 100,000 shares of Rs. 10 each payable as follows :


Applications were received for 160000 shares out of which letters of regret were issued for
30,000 shares. Full allotment was made to applicants for 40000 shares. Pro-rata allotment was
made on the balance.
A shareholder holding 100 shares to whom full allotment was made, failed to pay allotment money.
Another shareholder holding 200 shares to whom pro rata allotment was made also failed to pay
allotment money. On first call, there was a further default on 300 shares. All these were forfeited. The
first lot of 300 was reissued at the rate of Rs. 8 per share as fully paid up shares.

Pass necessary journal entries.

In the books of A
Journal Entries

1. When application money received on 160000 @ Rs. 3


each.
Bank Account Debit 4,80,000
Share Application Account Credit 4,80,000

2. When Application money transferred to capital account,


returned money to applicants and balance transferred to
share allotment account
Share application account Debit 480,000
Share capital account Credit 3,00,000
Bank Account Credit 90,000
Share Allotment Account Credit 90,000

3. When allotment money is due on 100,000 shares @ Rs.


2 per share.
Share Allotment Account Debit 2,00,000
Share Capital Account Credit 2,00,000

4. When Allotment money has received except not failed


( See working notes)

Bank Account Debit 1,09,700


Share Allotment Account Credit 1,09,700

5. When First call's money due ( 1,00,000 shares @ RS.


3)
Share First Call Account Debit 3,00,000
Share Capital Account Credit 3,00,000

6. When First Call money received ( 100,000 -600) @ Rs.


3
Bank Account Debit 2,98,200
Share First Call Account Credit 2,98,200

7. When forfeiture of Shares of 600 due to non- payment


of allotment money and call money
Share capital account Debit 4800 ( 600 shares X Rs. 8)
Share Allotment Account Credit 300 ( see working note 3)
Share First Call Account Credit 1800 ( 600 X Rs. 3)
Share Forfeiture Account Credit 2700 ( Balance)

8. When Forfeiture Share Re-issued


Bank Account Debit 2400 ( 300 X Rs. 8)

Share Forfeiture Account Debit 600 ( Discount on re-issue of shares 300 X RS. 2 ( Rs. 10 -Rs. 8)
Share Capital Account Credit 3000

9. Transfer of Net Balance of Forfeiture Account to Capital


Reserve ( See Working Note )
Share Forfeiture Account Debit 600
Capital Reserve Account Credit 600

10. When Final call's money due ( 99,400 shares @ RS.


2)

Share First Call Account Debit 1,98,800


Share Capital Account Credit 1,98,800

11. When First Call money received ( 99,400) @ Rs. 2


Bank Account Debit 1,98,800
Share First Call Account Credit 1,98,800

Working Notes
First of all you need to make the pro-rata table

1. Advance received of allotment money at the time of application.


If there are alloted Rs. 180,000 shares , application received = Rs. 270,000
If there is alloted 1 share, then application received = 270,000/180,000
If there is alloted 200 share (failed allotment money), then application received for ths = 9/6 X 200 =
3/2 X 200 = Rs. 300
2. Calculation of amount received on allotment
Amount Due on allotment = Rs. 2,00,000
Less : Received on application = 90,000
------------------------------------------------Balance __________________1,10,000
Less allotment money
on 100 shares full allotment is
made ( Failure to pay allotment
money) ( 100 X 2 ) _________ 200
-------------------------------------------------Balance__________________1,09,800
Less Allotment money on _____
200 shares alloted on pro-rata

100

basis
{200 X 2 - RS. 300 (Already received at the time application) }
---------------------------------------------------------------Amount received at the time of allotment = 1,09,700
==========================================
3. Calculation of Not received allotment Money
1. Failure on Full allotment = Rs. 200
( Failure to pay allotment money) ( 100 X 2 )
2. Failure of pro-rata payment = Rs. 100
{200 X 2 - RS. 300 (Already received at the time application) }
------------------------------------------------------------Total not received allotment money = Rs. 300
=======================================
4. Calculation of amount transferred to capital reserve
Amount received on 100 shares full payment of application money = Rs. 300
Amount received on 200 shares which is pro-rata
(It means, we have received 300 shares application money
200 X 90,000/60,000)

Now 300 X 3 Application money = Rs. 900

-------------------------------------------------------------------------------Total __________________________________________ Rs. 1200


Less discount allowed on reissue of shares )_____________ Rs. 600
----------------------------------------------------------------------------Transferred to Capital Reserve ______________________ Rs. 600
====================================================

Redeemable Preference Shares


1 Vinod Kumar July 1, 2010

When the preference shares are issued with the stipulation that these shares are to be
redeemed after a certain period of time, then such preference shares are known as
redeemable preference shares.
According to section 100 of Indian Company Law, " If a company collects the money through
redeemable preference shares, this money must be returned on its maturity whether company is
liquidated or not. Section 80 describes the following provisions relating to redeemable preference
shares :
1 # Its repayment will be out of net profit of company or amount received through issuing of new
shares. These shares will never be redeemed by the amount of new issue of debentures of
company. It means, we can not use loan for repayment of preference share capital. Company also
can not use the sale amount of any asset for redemption of redeemable preference shares.
2. # Capital reserves from forfeiture of shares and share premium account are not available for
payment to redeemable preference shareholders.
3. # No such shares shall be redeemed unless they are fully paid. Only fully redeemable shares will
be redeemed.

ournal Entries of Redemption of


Preference Shares
1 Vinod Kumar August 8, 2012

For recording the redemption of preference shares in the books of company who issued the shares,
we see whether these preference shares are fully paid or not. Only fully paid up shares can be
redeemed. In redemption, we repay the amount of preference shareholders. Following are the
main journal entries which are passed for redemption of preference shares.

1. When preference shares are due on the maturity


date with its premium amount. At that time, we will
pass following journal entry.

Redeemable preference share capital account Dr. ( With face value)


Premium on Redemption Account Dr. ( with the premium to be paid on redemption )
Preference Shareholders Account or Preference Share Redemption Account Credit

Understanding of this Journal Entry :

Main aim of debiting redeemable preference share capital account is to reduce this capital
from business. When any capital is reduced from business it will be debited when any capital is
increased, it will be debited. In previous post, I told that capital is the liability of business. So, we
have applied journal entry rule of liability. Every decrease in the liability will be debited and every
increase in the liability will be credited in the journal entry. Like preference share capital, premium on
redemption is also our liability and we are reducing it by debiting it.
We are crediting preference shareholders account because we have transfer all capital liability to
the personal liability of shareholders. Because our personal liability to pay the amount of redeemable
preference shareholder is increased due to decrease the same capital from our books, we have
credited preference shareholders account. By this entry company can get the benefit to pay each
shareholders personally. After passing above entry preference shareholders account or preference
share redemption account will show in the liability side before payment to same shareholders.
One of main reason of credit the preference of shareholders account instead credit of cash or
bank account is to get time for getting cash from different resources. Repayment to preference share
capital may be the big project of any company because if we pay them without getting fund from any
big resource, our working capital and cash flow will be affected. So, after passing this entry, whole
management starts to search the fund for repaying to preference shareholders.

Example of this Journal Entry


On 1st January, 2012, The company decided to redeem 10000 7% redeemable preference shares at
$ 13 which had issued at $ 10 each were fully paid up. Pass the journal entry of transferring same
capital and premium to shareholders account.

7% Redeemable Preference Share capital account Dr. 1,00,000


Premium on Redemption Account Dr. 30000
7% Redeemable Preference Shareholders' Account Cr. 1,30,000

2. When Fund is managed for Repayment to


Preference Shareholders.
There is not any magic that we pay the money the shareholders within one second. Management
make the resources for repayment to preference shareholders. It may be the reserve of old profits of
company or company may issue new equity shares or taken of new loan or selling his assets for
repayment the preference shareholders.
(i) If company uses his old profit reserves for repayment to preference shareholders. It
means, company has saved money out of his profit for this day. We take this money by
passing following journal entry.

Profit and loss account Dr. or General Reserve Account Dr.


Capital Redemption Reserve Account Cr.

(ii) If company issues new equity shares for redemption of preference shareholders.

Bank Account Dr.


Equity Share Capital Account Cr.

(iii) If company sells its assets on the loss for getting fund for repayment to preference
shareholders.

Bank Account Dr
Profit and Loss Account Dr. ( Loss on sales of assets )
Particular Asset Account Cr.

(iv) If company gets new loan for repayment to preference shareholders.

Bank Account Dr.


Loan Account Cr.

3. When Company Pays to Redeemable Preference


Shareholders.

Preference Shareholders Account or Preference Redemption Account Dr.


Bank Account Cr.

4. When Company converts preference share capital


into equity share capital.
At that time, we will not pass above entries, we will pass only following entry.

Preference Share Capital Account Dr.


New Equity Share Capital Account Cr.

5. Premium on Redemption Account is Closed through


Stock Premium Account or General Reserve
We can fulfill payable amount of premium on redemption account through stock premium account or
our general reserve account.
Example of this Journal Entries
On 1st January, 2012, The company decided to redeem 10000 7% redeemable preference shares at
$ 13 which had issued at $ 10 each were fully paid up. To provide redemption, the company decided

to issue 5000 equity shares of $ 10 each at $ 14 each. The profit and loss account showing the
credit balance of $ 1,00,000.
This is the part of first example. So, please see the journal entry of first example (above).
(i) Money from issue of equity share capital

Bank Account Dr. 70,000


Equity Share Capital Dr. 50,000
Share premium Account Dr. 20,000

Total payable amount to preference shareholders = 130,000


Less money from equity shareholders + share premium = - 70,000
------------------------------------------------------------------------balance $ 60000
=================================================
(ii) Rest 60,000 will be managed from credit balance of profit and loss account. Transferring
the Profit and loss account's Credit balance to Capital Redemption Reserve account

Profit and loss account Dr. 60,000


Capital Redemption Reserve Account Cr. 50,000
Premium on Redemption Account Cr. 10,000

(iii) For paying the preference shareholders

Bank Account Dr. 130,000


Preference Shareholders Account Cr. 130,000

Accounting Treatment of Provision


for Income Tax
16 Vinod Kumar November 28, 2008

Before writing this article , I have studied deeply several books of accounting . Actually this type of
provision is needed in Corporate type business . Because in the sole trade and partnership firm
there is no treatment of provision for income tax and income tax paid because above two type
business level , it is the duty of business man to pay income tax personally . So in above situation if
he take any fund from business for paying income tax , it is deemed as drawing or other words we
can say that his capital will reduce if you pick some amount for paying any income tax . No other
treatment is done in sole trade or partner ship
Now In Case of Company or Corporate
I am giving you full detail of accounting treatment , if you have to do this type of work in any
company .
Ist Step
Understanding the meaning of Company . I have already read on it see .
2nd Step
Understanding the meaning of provision of Income tax

In India , we all company pay income tax of previous year income . Means what we earn in last year
we have to pay tax on next year that is called assessment year. But Under the law of Income tax , all
company have to pay tax in advance .
So without actual earning we starts to estimate earning .
For Example
Suppose company can guess that it will earn RS. 5 crore in this year .
So on this advance guess company make his reserve or provision of income , it may be the 5% or
10% or 15% or 30% on his estimated income. This is called provision for income tax .
Now company Make the voucher entry of this provision by providing amount from profit and loss
account
Profit and loss account Debit
Provision for income tax account Credit
After provision or estimated income tax , company submit his advance income tax return to income
tax department ,
then pass the following entry
Advance Income tax account debit
Bank Account credit
After one year when income tax department calculate the real income tax by providing the real
income position of company in previous year .
You will remember following point

Adjustment of actual income tax with provision


Actual income tax will adjust with provision of income tax by passing following adjustment entry
Provision for income tax account Debit
Income tax Account ( Actual after assessment ) credit

We must calculate the difference between actual paid tax and ( advance + tds )
If advance and tds is more than actual tax , then income tax department return your excess tax paid
At this time two general entries will pass
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount
Bank account debit
Income tax account credit

If advance and tds is less than actual tax , then income tax department demand more tax from you ,
and you will pay by following journal entry
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount
Income tax account Debit
Bank account Credit
Next time , I will make all accounts like provision for income tax account , advance income tax
account , income tax deducted at source account and income tax account account in tally 9 and
publish for you . So be wait .

Indian income-tax law and practice;: Including Income-tax act, 1961, Finance act, 1964, Wealth-tax
act, Gift-tax act, The Companies (profits) surtax and Expenditure-tax act

Profit and Loss Appropriation


Account and Its proforma
6 Vinod Kumar December 31, 2009

Profit and Loss Appropriation account is the part of financial statements of company. It is different
from profit and loss appropriation account of partnership firm . When a company makes his profit
and loss account, its net profit is transferred to the credit side of profit and loss appropriation
account. Profit and loss account shows only the net profit or net loss from operation of business but
profit and loss appropriation accounts shows all non- operational adjustment which is needed for
proper distribution of net profit between shareholders and company for future growth.

So, net profit of P/L A/c is used for providing reserve, dividend, dividend distribution
tax and adjustment of income tax.

In the debit side of this account, we will show the following items.

1.

Transfer to reserve /general reserve.

2.

Transfer to dividend/interim dividend/proposed dividend.

3.

Debenture redemption fund account.

4.

Dividend equalization fund account.

5.

Dividend Distribution Tax (A 15% dividend distribution tax and surcharge of 3% is paid by
companies before distribution.)

6.

Income tax for previous year not provided for.

7.

Surplus transfer to balance sheet.

In the credit side of this account, we will show the following accounts

1.

Balance of surplus of previous year.

2.

Net Profit of this year.

3.

Amount withdrawn from general reserve or any other reserve.

4.

Provision such as income tax provision no longer required or excess of provision or refund of tax.

How to Prepare a Balance Sheet


of Company
14 Vinod Kumar January 4, 2010

Preparation of balance sheet of company is very necessary, because Indian Company law 1956
gives strict instruction about the format of balance sheet of a company. A company can make
balance sheet according to the form given in Part I of schedule VI of company law 1956. A company
can also make balance sheet summary form, but it has to attach its schedule in which explanation of
different components are given. We are explaining different components of balance sheet of
company which will be helpful for students to prepare balance sheet of company.

[* Remember the form of balance sheet under Section 211]

You should remember balance sheet and its all components thoroughly. It can be made either
horizontal or vertical form. But total of assets should be equal to total of liabilities. Here, I am
explaining these components.

Assets Side of Balance Sheet

Assets are written in right side of companys balance sheet. In these assets, we include.

1. Fixed Assets

We will show all fixed assets which are purchased and used in business. This is the long
termexpenditure of company. In these assets, we will include following.

I)

Land

II)

Building

III)

Plant and Machinery

IV)

Furniture and Fixture

V)

Leasehold assets

VI)

Development of property

VII)

Vehicles

VIII)

Live stocks

IX)

Railway sidings

X)

Equipment

We also include intangible assets in fixed assets head. Following are the main examples of
intangible assets.

I)

Goodwill

II)

Patents

III)

Trade marks and design

Depreciation is charged on every fixed asset except land, because value of land will increase after

some time. Here, students are given advice that they should calculate the value of net fixed assets, if
different fixed assets are purchased or sold during the year. The following table will be the part of
working note.

2. Treatment of Investment in balance sheet

Investment is outflow of fund for getting interest or dividend earning. So, it is the asset of company
and will include in assets side. The following are the main investments.

a)

Investment in Government or trust securities.

b)

Investment in Shares, debentures or bonds

The following points must be kept in mind while you are showing investment in balance sheet.

i)

Investment in fully paid up shares must be shown separately from investment in partly paid
up shares.

ii)

Investment in the form of shares in subsidiary company must be shown separately from
investment in any other company.

c)

Investment in immovable properties.

d)

Investment in the capital of partnership firms.

Investment will be shown on cost or market value which is less.

3. Treatment of current assets , loan and advances in


balance sheet

A)

Current assets

Current assets will be shown in separate head and following components will be included in it.

i)

Stock in trade

ii)

Work in progress

iii)

Stock of stationary

iv)

Stock of loose tools

v)

Stock of stores and spare parts

vi)

Sundry debtors less provision for doubtful debts

vii)

Cash in hand

viii)

Bank balance

a)

With schedule bank

b)

With other banks

B)

Loan and Advances

The amount which is given by company to others in the form of loan or advances will be shown in
asset side. Followings are its main examples.

a)

Advance and loan to subsidiary company

b)

Advance and loan to partnership firm

c)

Bill of exchange / Bill receivables

d)

Advance expenses paid

e)

Outside incomes.

4. Miscellaneous expenditures
Expenses which are not written off will be shown in asset side of balance sheet. There is no market
value of these expenses. Examples are given below.

i)

Preliminary expenses

ii)

Commission or brokerage of subscription of shares or debentures

iii)

Discount allowed on issue or shares and debentures

iv)

Interest paid out of capital during construction

v)

Development expenditure

5. Profit and Loss Account

If company suffers net loss after adjusting all reserves, then it will be shown in asset side. This
amount can be also deducted from reserves in liabilities side. That time, we will not show it in asset
side.

Liabilities Side of Balance Sheet

Liabilities are written in left side of companys balance sheet. In these liabilities, we include.

1.

Share Capital

In share capital of company, we have to show authorized capital, subscribed capital, called up
capital and paid up capital. For calculating paid up capital, we will deduct calls unpaid and add
original paid up amount of forfeited shares.

2.

Reserves and Surplus

Following reserves will be shown in liabilities side of balance sheet of company.

i)

Capital reserves

ii)

Share premium account

iii)

Other reserves

iv)

Surplus balance in profit and loss account after providing dividend, bonus or reserves.

v)

Sinking fund

3.

Secured Loan

If any loan is taken by company after keeping any asset as security, then it will be shown in secured
loan head. Its detail is given below.

i)

Debentures

ii)

Loan and advances from subsidiaries

iii)

Other loan and advances

iv)

Interest payable on secured loan

4. Unsecured loan

Following will be the unsecured loan.

i)

Fixed deposits of public

ii)

Short term loans and advances

iii)

Other loans

5. Current Liabilities and Provisions

All liabilities which is payable within one year, will be included in current liabilities head.

A) Current Liabilities

i)

Acceptance or bill payables

ii)

Sundry creditors

iii)

Interest payable other than on loan

iv)

Outstanding expenditures

B)

Provisions

i)

Provisions for taxations

ii)

Proposed dividend

iii)

Provision for provident fund

iv)

Provision for insurance, pension and other staff benefit schemes

v)

Other provisions

6. Contingent liabilities

These types of liabilities will not be shown in balance sheet. But a simple footnote is made for its
detail. Following may be the contingent liabilities of company.

i)

Claims against the company not acknowledge as debts

ii)

Uncalled liability on shares paid

iii)

Areas of fixed cumulative dividends

iv)

Any other contingent liability of company

Making of Cash flow Statement


with both direct and indirect
methods.
0 Vinod Kumar October 31, 2008

In good question of making cash flow statement , the examiner must give you two year balance sheet of company , a
profit and loss account and some additional information for making cash flow statement . With above three basic
information you can easily make cash flow statement with direct or indirect method .
Here we are taking one practical question , then we solve it both direct method and indirect method. This question
can be asked in CA , ICWA , MCA ,MCOM and MBA exams

The following is the abstract of balance sheet of Software securities ltd for the year 2005 and 2006
Liabities

Provision for depreciation 2005 Rs. 108000 and 2006 RS. 396000
Retained earning 244800 370800
9% debenture 270000 198000

Account payable 72000 41400


Expense payable 0 18000

Assets
Land 2005 - Rs. 126000 and 2006 - Rs. 81000
building 360000 360000
Accumulated depreciation
on building 19800 37800
Equipment 122400 347400
Accumulated depreciation on
equipement 18000 50400
stock in hand 10800 97200
Account receivable 36000 122400
cash in hand 66600 97200
Preliminary expenses 10800 7200

Question gives you also income statememtn of software securities ltd

Sales 1602000
less cost of sale 837000
less operating exp. 397800
less interest exp. 21600
loss on sale of equipments 3600
126000
------------------------Net income before tax 342000
provision of tax 117000
---------------------Net Income after tax 225000
__________________________________________
Additional information
1. Operating expenses include depreciation of rs. 59400 and charges from preliminary expenses of rs. 3600
2. Land was sold at its book value
3. cash dividend paid for the year 2006 amounted to rs. 27000 and fully paid bonus shares were given in the ratio of
2 shares for every 3shares held.
4. Interest expenses was paid in cash.

5. Equipment with a cost of rs .298800 was purchased for cash .Equipment with a cost of rs . 73800 ( book value rs.
64800) was sold for rs. 61200
6. Debenture for rs. 18000 were redeemed for cash and for rs.54000 were redeemed by converting into equity shares
at par value.
7.Equity shares of rs. 162000 were issued for cash at par.
8. Income tax paid during the year amounted to rs. 117000
Prepare cash flow statement with
direct method
indirect method

Cash flow statement with direct method


__________________________________________________________
Particularv Amount Amount
-------------------------------------------------------------------------------------------------A- catagory
Cash flow from operating
activity
Inflow of cash
Cash sale & amount from debtors
calculation
= sale + opening bal. of debtors closing balance of debtors
= 1602000+36000-122400= (+) 1515600
Any other operating income (+) nil

Less
Cash outflow
1. Cash purchase and amount paid to creditors
Calculation
= Cost of goods sold +opening creditors
-closing creditors =
= 837000+72000-41400= (-) 867600

2. Cash operating Expenses

Operating expenses as per profit and

Loss account -depreciation - preliminary exp.


- Outstanding expense closing
= 397800 - 59400 -3600 -18000 = (-) 316800
Out flow of stock
+ opening stock (-) 86400
-closing stock =10800-97200
____________________________________________

244800
Less income tax paid (-) 117000
__________________________________________
127800 127800
________________________________________

B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
______________________________________________
192600 192600
______________________________________________

C- catagory
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600
_______________________________________________

95400 95400

_______________________________________________

Add opening cash balance + 66600


____________________________________________________________

Closing balance of cash 97200


_____________________________________________________________

Cash flow statement with Indirect method


__________________________________________________________
Particularv Amount Amount
-------------------------------------------------------------------------------------------------A-category
Cash flow of operating activity
1st Point
Net Profit before taxation and extraordinary
Items 342000

2nd Point
Add for non cash and non operating expenses
And losses
1. Depreciation 59400
2. Preliminary expenses written off 3600
3. Discount on issue of shares and deb. w/o nil
4. Goodwill written off nil
5. Patent and trade marks written off nil
6. Interest on borrowing and deb. 3600
7. Loss on sale of fixed assets 21600
______________
430200

3rd Point
Less non cash and non operating incomes (-) nil
1. Dividend income(For non financial co.)

2. Rental income
3. Profit on sale of fixed asset

_________________
4th point ( Ist point +2nd Point -3rd Point ) 430200

Adjustment of working capital changes


5th point
Add Decrease in current assets and increase in
Current liabilities (+) nil
1. Decrease in stock
2. Decrease in debtors
3. Decrease in accrued income
4. Decrease in prepaid expenses
5. Increase in creditors
6. Increase in bill payables
7. increase in outstanding expenses (+) 18000
8. Increase in advance incomes
9. Increase in provision for doubtfull debts
____________________
448200
6th Point
Less increase in current assets and decrease in (-)

Current liabilities
1. Increase in stock 86400
2. Increase in debtors 86400
3. increase in accrued incomes nil
4. increase in prepaid expenses nil
5. decrease in creditors 30600
6. Decrease in bill payables nil
7. decrease in outstanding expenses nil
8. decrease in advance incomes nil
9. Decrease in provision for d/d nil

________________________________________________________

244800
Less income tax paid (-) 117000
________________________________________________________
127800 127800
_____________________________________________________

B- Category
Cash flow from investing activity
Inflow of cash
1. sale of equipment (+) 298800
2.sale of land (+)45000
Less Cash outflow
1 cash paid for purchase of equipment (-) 298800
______________________________________________
192600 192600
______________________________________________

C- catagory
Cash flow of financing activity
Cash inflow
1. Issue of new shares (+) 162000
Less Cash outflow
1. Cash paid for redemption of deb. (-) 18000
2. Dividend paid (-) 27000
3. Interest Paid (-) 21600
_____________________________________________________________________

95400 95400
________________________________________________

Add opening cash balance + 66600


____________________________________________________________________

Closing balance of cash 97200

Preparation and Presentation of


Final Accounts of Joint Stock
Company
1 Vinod Kumar January 21, 2013

For preparing and presenting of final accounts of joint stock company, we have to follow amended
provisions of Indian Company Law 1956. These provisions do not apply on insurance, electricity
and banking companies. These companies have to follow the provisions of their relating laws.
Except these companies, we will explain all the provisions and rules for preparing and presenting of
final accounts of join stock companies.

As per Company Law, A Joint Stock Company has to prepare and to present following final
accounts

1. Manufacturing Account : This is the part of Final accounts of joint stock company which is in
manufacturing or construction industry. This account is made for finding cost of production. Same
cost of production is transferred to the Debit Side of Trading Account
2. Trading Account : This Account is also part of the final accounts of joint stock company. With the
help of this account, we find the gross profit which is transferred to Profit and Loss Account.
3. Profit and Loss Account : This Account is also part of final accounts of joint stock company.
This account is made for finding the net profit after taxation. This net profit is transferred to Profit and
Loss Appropriation Account.
4. Profit and Loss Appropriation Account : This account is made for
all nonoperational adjustments. In this account, we adjust the amount of general reserve and
dividend. Balance of this account is surplus which is transferred to the liability side of balance sheet.
This surplus is included in the surplus and reserve section under the liability side of balance sheet.
5. Balance Sheet : Balance sheet of joint stock company shows the financial position. In this
sheet, we show all the assets and liabilities. This balance sheet provides lots of useful information to
investors, Govt., employees and customers.
Now, we explain which section tell you what.
1. Section 210
Section 210 of Indian Company Act 1956, explain the provisions for preparing final accounts.
Schedule VI ( Part II)
a) Same provision applies for Income and expenditure account
Like Trading and profit and loss account, A Not-for Profit Organisation will make income and
expenditure account.
b) Result
Profit and loss account should result of the business operation. We will debit all the operational

expenses and we will credit all the operational incomes. Result will be in the form of profit or loss.
c) Clarity
Every data in profit and loss account should be shown in very clear way. For example, we take the
sales. It is the part of income of company. Every item and every product categories sales should be
included in the company sales. We also include the sales agents' sale in it.
d) Expenses paid or Accrues and Provisions
All the expenses whether these are paid or not should be included in the debit side of profit and loss
account. We should also adjust different provisions in profit and loss account.
Main provisions are
i) Provision for bad debts
ii) Provision for depreciation
iii) Provisions for Taxation
e) Divisible Profits
Profit Available or dividend to shareholders are known as divisible profits. Proposed, interim and
declared dividend should be adjusted from profit and loss appropriation account.
2. Section 211
As per section 211, company's balance sheet should as per schedule VI part I. We have explained
this concept with more detail at here.
Important for Students : {This written lecture is the part of CS Accounting
Notes and Corporate Accounting}

Profit Prior Incorporation

2 Vinod Kumar October 18, 2010

Profit prior to incorporation is that profit which a company gets between the period of date of buying
and date of incorporation. Suppose, A company buys XYZ company on 1st Jan. 2010 and it has to
incorporate at 1st April 2010. Then profit between 1st Jan. 2010 and 1st April 2010 will be profit prior
to incorporation. This profit can not be used for paying dividend to shareholders. Because current
shareholders capital is not involved for this profit, so this will be capitalized profit and it will be
transferred to capital reserve account. If company gets loss prior to incorporation, it will be
transferred to goodwill account.

Ascertainment of Profit or Loss Prior to Incorporation

Following steps are taken for calculating the profit or loss prior to Incorporation :
1st Step : Make Trading Account of Whole Period
First of all, we have to make trading account for calculating gross profit of whole period. We will not
make different trading account for prior and after incorporation because after calculating gross profit
of a year, we can divide it prior incorporation on the basis of time.
2nd Step : Calculate Time Ratio and Sale Ratio
Time and sale ratios are two very important ratio which can be used for allocation of gross profit and
other items of profit and loss account into prior and after to incorporation. Suppose, if After buying

company, if it was incorporate after 4 months from 1st Jan. 2010, then time ratio will be 4 months : 8
months or 1:2
If before incorporation sale is Rs. 1,00,000 and after incorporation sale is Rs. 3,00,000, then sale
ratio is 1:3
3rd Step : Make Profit and loss account prior and after incorporation in different Columns
a) Gross profit will divide on the basis of sale ratio
b) All expenses which are relating to sale will be divide on the basis of sale ratio
c) All fixed charges like salaries, rent, audit fees, insurance, depreciation, administrative expenses
will divide on the basis of time ratio. All expenses which done after incorporation will be charged
totally to after
incorporation.
Example
Subhash ltd. was incorporated on 1st march, 2010 and received its certificate of commencement of
business on 1st April, 2010. The company bought the business of M/S small and co. with effect from
1st Nov. 2009. From the following figures relating to the year ending 31st oct. 2010, find out the
profits available for dividends.
a) Sales for the year were Rs. 6,00,000 out of which sales up to 1st march , were Rs. 2,50,000
b) Gross profit for the year was Rs. 1,80,000
c) The expenses debited to the profit and loss account were :
rent 9000
salaries 15000
director's fees 4800
interest on debentures 5000
discount on sales 3600
depreciation 24000
general expenses 48000
advertising 18000
stationery expenses 3600

commission on sales 6000


bad debts 500 relate to debts created prior to incorporation 1500
interest to vendor on purchase consideration up to 1st may 2010
Solution

Working Notes :
a) Sales ratio is 250000 : 350000 or 5:7
b) time ratio except for interest to vendor 4 months : 8 months or 1:2
c) time ratio for interest to vendor 4 months : 2 months or 2:1
d) Director fees and interest on debentures relate to post - incorporation period.

How to Calculate Managerial


Remuneration in Company
Accounts
3 Vinod Kumar October 20, 2009

Indian company laws makes the provision regarding maximum amount given to directors , managers
and managing directors . The rules and regulations are mentioned in section 349, 350, 351 of Indian
company law 1956. Here we are explaining simple steps for calculating managerial remuneration
special for commerce students and accountants.

In case of nil profit


If any company earns nil profit, then and managerial remuneration is more than 10%, then
managerial remuneration will limited up to Rs. 75000 to Rs. 200000

(Disclaimer: Please check new amendments of company law 1956 regarding this amount)
Schedule X111and its part 11 has directed with following way.
(Note : Managerial persons include managing or whole time directors and managers . )
In above managerial remuneration following items will not included :Contribution to provident fund + gratuity + encashment of leave at the end of the tenure +childrens
education allowance + leave travel concession
Definition of effective capital of company
Effective capital of company means paid up capital excluding revolution reserve .

In case of Company earns profit


At that time managerial remuneration is calculated on net profit . For this net profit is calculated with
following way:-

Gross profit + Add following

1. Subsidies received by company from govt.


2. Profit on sale of fixed asset but not include capital revenue of issue of shares , sale of business ,
etc.
- Less the following items
1. Usual working charges
2. Bonus or commission paid or payable to company staff .
3. Tax liability by central govt. except income tax liability
4. Interest on mortgage
5. Repair expenses
6. Normal depreciation
7. Liability of legal charges / damages
8. Bad debts
Following items will not deduct
1. Remuneration payable to other directors, managerial directors and managers .
2. Income tax charges
3. Capital losses
4. Unpaid losses and penalties
After calculating net profit, the following chart showing the rate of remuneration which is charged on
calculated net profit.

Right Shares
4 Vinod Kumar October 11, 2010

Right shares are those shares which are issued to existing shareholders. According to section 81 of
Indian company act 1956, Company can issue right shares only after the two years of creation of
company or one year of first issue of shares which ever is earlier."

Steps for issuing right shares

1st Step: Right shares must be in ratio of equity shares of existing shareholders.
2nd Step: Right Issue by 15 days notice
Right shares will be issued with 15 days notice. This notice will be offer. Existing shareholders can

either accept or reject this offer.


3rd Step: Right shares issue must not be opened more than 60 days under SEBI guidelines.
Provision of 81 will not apply on private company. This rule will not also apply on conversion of
debentures into shares.
Benefits of Issuing Right Shares
1. More control on existing shareholders
Because right shares are issued to existing shareholder, so there is no risk of losing of control of
existing shareholders. Existing shareholders share will increase in company and they can take
decision without any compromise with the principles of company. It is very helpful to achieve the
missions of company.
2. No loss to existing shareholder
By issuing shares to existing shareholders, value of share will increase due to stability in controlling
power of company. So, there will not be any loss to existing shareholders with right shares.
3. No cost for issuing shares to public
Company has not to give any invitation to public, so advertising cost and other new issue cost will
decrease with right shares.
4. Helpful to increase the goodwill of company
It is also way to increase the goodwill and reputation of company in industry.
5. Capital formation
Company can get capital at any time without any delay because company can easily issue of shares
to existing shareholders just sending right shares offer notice.
6. More scientific

Distribution technique of right shares issue is more scientific. Not all shares will get by single
shareholders but it will be in the proportion of existing shares which is in the hand of old
shareholders at this time.
For Example
A company is planning to raise funds by making rights issue of equity shares to finance its
expansion. The existing equity share capital of the company is Rs. 50, 00,000. The market value of
its share is Rs. 42. The company offers to its share the right to buy 2 shares at Rs. 11 each for every
5 share held. You are required to calculate:
1. Theoretical market price after right issue
2. The value of right
3. % increase in share capital
Solution
Market value of 5 shares already held by a shareholder @ Rs. 42 = 210
Add the price to be paid by him for acquiring 2 more shares@ Rs. 11 per share = 22
Total Rs. 232
1. Theoretical market price of one share = 232/7 = Rs. 33.14
2. Value of Right = Market price theoretical market price = 42- 33.14 = 33.86
3. % increase in share capital
Present capital = 50, 00,000
Right issue Rs. 50, 00,000 X 2/5 = 20, 00,000
% increase in share capital = 20, 00,000 / 50, 00,000 X 100 = 40%

Underwriting of Right Shares


Sometime, company can contract with underwriter who promises that if existing shareholders will not
buy, he will takeover all not right shares. Underwriters and sub-underwriters may be financial
institutions, stock-brokers, major shareholders of the company or other related or unrelated parties.

Meaning of Bonus Shares and


Source of Bonus Shares
1 Vinod Kumar June 23, 2008

Some of you have confuse about bonus shares . Here I am giving complete definition of bonus
shares . First , we should know about bonus .
Meaning of Bonus
Bonus means premium or gift which is paid normally in cash .

Meaning of Bonus shares


Bonus shares mean a gift or premium in form of stock by a company to its shareholders . It may be
stated as extra dividend to share holder in a joint stock co. from surplus profits in the legal context a

bonus share is neither dividend nor a gift . It is governed by regulations of the company law that it
can neither be declared like a dividend nor gifted away .
Source of bonus shares
The bonus shares can be issued out of profit or reserve which have been earned by the company
profit or reserve should be free for the purpose of dividend and as specified in company act . The
reserves can not be used for issue of bonus which are not earned by company .
The following is the list of reserves which can be used for issuing bonus shares by passing the
journal entries under its accounting treatment .

Profit and loss account

general reserve

revenue reserve

free reserves

dividend equalization fund

capital reserve

sinking fund

debenture redemption reserve only after redemption

development rebate reserve

allowance after expiry of 8 years

capital redemption reserve

share premium or security premium if received in cash

Accounting Treatment of Bonus


Shares
0 Vinod Kumar December 4, 2008

I am giving the full detail of accounting treatment of bonus shares step by step
1st Case
When the partly paid up shares are converted into fully paid up shares through bonus issue.
For providing the amount of bonus out of reserve , then the following journal entry will pass
Capital reserve account debit xxxx
General reserve account debit xxxx
Revenue reserve account debit xxxx
Free reserve account debit xxxx
Dividend equalization fund account debit xxxx
Profit and loss account debit xxxx
Bonus to equity shareholders account credit xxxx
For amount due on final call of shares ( Existing shares unpaid amount )
Share final call account debit xxxx
Share capital account credit xxxx
For adjustment of final call amount out of profit
Bonus to shareholder account debit xxxx

Share final call account credit xxxx


2nd case
When new fully paid up bonus shares are issued
a) for providing amount of bonus
Capital reserve account debit xxxx
share premium account debit xxxx
Capital redemption reserve account debit xxxx
Other general reserve account debit xxxx
Profit and loss account debit xxxx
Bonus to shareholder account credit xxxx
b) for issue of bonus
Bonus to equity shareholder account debit
Equity share capital account credit

SEBI Guidlines for determining


maximum quantom of bonus issue
1 Vinod Kumar December 4, 2008

First test
Residual reserve test
As per this guidline the residual reserve after the proposal of capitalisation ( bonus issu) should be at
least 40% of increased paid up capital
5 Free reserve - 2 paid up capital before the bonus issue
= -----------------------------------------------------------7
2nd test
Profitability requirement test
As per this guidline 30% of average amount of profit before tax in the previous three year should
yield a rate of dividend of expended capital base of the company at 10%
= 3 average profit - existing share capital
3rd test
Maximum limit requirement
This test indicates teh maximum amount which can be utilised for issue shares capital at one time
shall not exceed the total amount of paid up equity capital of the company
Amount of bonus < total existing quity paid up capital To determine a maximum amount of bonus
which can be decleared the test mention above will be apply . Firstly the first two test will be consider
the amount of bonus will be restricted upto the lower amount but this amount will not exceed the
existing paid up capital of the company . In brief the following steps should be consider for the
purpose of bonus 1. Bonus shares not permitted in less existing partly paid up shres are converted
into fully paid up shares 2. Bonus can not exist teh paid up equity capital of the company 3. The

balance of residual reserve must not less than 40% of increased capital 4. 30% of average profit
before tax of previous 3 year must yield 10% dividend on the increased capital

Bill of Exchange Accounting


4 Vinod Kumar December 29, 2010

Today, we will cover very important topic of financial accounting. "Bill of Exchange
accounting" or "Accounting Treatment of Bill of Exchange" is relating to journal entries of bill of
exchange. We try to explain it with video tutorial and contents. First of all we explain basic concepts
of bill of exchange
What is bill of exchange?
Bill of exchange is written order letter in which there is not any condition. Writer's sign will be in it. In
this letter, order to other person is given to pay the certain sum of money to the writer of letter or to
pay any other authorized person or who has this bill of exchange.
Essential of a Bill of Exchange
1. It should be in written.

2. Unconditional order to pay.


3. Signed by writer.
4. Debtor must be a certain person.
5. Payment must be a certain amount.
6. Payment must be done on maturity of bill.
7. Acceptance must be given by debtor on this bill.
Parties of the Bill of Exchange
1. Drawer or Maker or Creditor
2. Drawee or Debtor or Acceptor
3. Payee or who have right to get payment
Maturity Date
Due date of bill is also called maturity date and we can get three day of grace period for paying debt
through bill.
Endorsement
If drawer signs on the back side of bill for giving the right to other for getting money from debtor, it
will be endorsement.
Dishonour of Bill of Exchange
If drawee or debtor does not pay the money of bill of exchange on maturity, then bill will be
dishonour. After this, debtor will be responsible to his unpaid dues.
Journal Entries in the books of Drawer
1. Drawer receives a bill accepted by drawee
Bill receivable account Dr.
To Drawee account

2. Drawee pays the bill on due date


Cash account Dr.
To B/R account
or
2. Drawee dishonours the bill on due date
Drawee account Dr.
To B/R account
3. If noting charges are paid by drawer
Drawer account Dr.
To Cash account
Journal Entries in the books of Drawee or Debtor
1. Drawer receives a bill accepted by drawee
Drawer account Dr.
To Bill payable account
2. Drawee pays the bill on due date
B/P Dr.
To cash account
or

2. Drawee dishonours the bill on due date


B/P account Dr.
To Drawer account
3. If noting charges are paid by drawer
Noting Charges account Dr.
To Drawer account