Acknowledgement
I would like to express my sincere gratitude to Mr. Mahender Singh for
providing this opportunity to work on this topic. She has always been
supportive and encouraging.
CONTENTS
Index Page No.
Acknowledgement
Introduction
Characteristics of a company
Classes or kinds of shares
Issues of shares
Terms of issues of shares
Accounting treatment
Forfeiture of shares
Forfeiture of shares originally issued at a premium
Reissue of forfeited shares
When shares belonging to pro rata category are forfeited
Illustration
Working notes
Conclusion
INTRODUCTION
Meaning
A company or a joint stock company is an enterprise established through a process of law for undertaking (usually) a business venture. A company is an artificial person existing in the eyes of law and distinct from its members. It has a share capital divided into shares, the owners of which are known as members or shareholders. Insolvency or death of a member has no effect on the life of the company.
Section 3(1) (i) of the Companies Act, 1956 defines a company as “ A company formed and registered under this Act or an existing company.” An existing company means “ A company formed and registered under any of the previous company laws.” The term ‘company’ has not been much clarified by the companies Act. Let us look at some definitions of the term for better understanding.
According to Chief Justice Marshal “ A corporation is an artificial being,invisible, intangibal, existing only in contemplation of the.”
According to Professor Haney “ A company is an artificial person created by law, having separate entity with a perpetual succession and a common seal.”
Characteristics ( Features ) of a company
Incorporation :- A company is an artificial person created through a process of law, i.e., the companies act,1956 having existence distinct from its members.
Separate Legal Entity :- A company is a separate legal entity from its share holders. It can own property, enter into contract, conduct business, sue or be sued. The activities and the working is regulated by its memorandum of
Association, Articles of Association and provisions of the Companies Act. Anyone can take legal action against the company and not the individual shareholder.
Perpetual Existence :- A company is not affected by the death, lunancy, or bankruptcy of its members or shareholders.
Transferability of shares :- The shares of a company are normally freely transferable in the case of public companies whereas they are not so in case of private companies.
Management and Ownership are separate :- A company is not managed by all the members but by their elected representatives called Directors. In other words, management and ownership are separate.
Common Seal :- Every company has its own common seal which is affixed on all the important documents of the company.
Classes or kinds of shares
Capital of a company is divided into units of small denomination called a share. Preference share and Equity shares are defined by the Companies Act, 1956 as follows:
1.
Preference Shares [ Section 85(1) ] : Preference shares are the shares
that carry the following two rights :(i) Preferential right of dividend to be paid as fixed amount or an amount calculated at a fix rate.
(ii) On winding up or repayment of capital, a preferential right to be repaid the amount of capital before any amount is paid to the equity shareholders.
Classes of preference shares
we may broadly classify the preference shares as:
(i) With reference to dividend
(ii) With reference to participation in profits (iii) With reference to convertibility and (iv) With reference to redemption.
(i)
With reference to dividend
equity shareholders. For example, a company has 10,000 7% preference shares of Rs. 100 each and dividend for the years 2007 and 2008 has not been paid. The company earn sufficient profits in the year 2009. In this case, the company shall pay Rs. 2,10,000 as dividend for three years to the preference shareholders.
Non-cumulative preference shares :- Non-cumulative preference shares are those shares which do not carry right to receive arrears of dividend. In the above example, preference shareholders shall be entitled to receive dividend only for the year 2009, i.e., Rs. 70,000.
(ii)
With reference to participation in profits
Participation preference shares :- The Articles of Association may have a provision to the effect that after dividend has been paid at the specified rate, the holders of
preference shares will have the right to participate in the remaining profits. The preference shares carrying this right are called participating preference shares.
Non - Participating preference shares :- The preference shares which do not carry the right to participate in the profits remaining after equity shareholders have been paid dividend are Non - Participating preference shares.
(iii) With reference to convertibility
Convertible Preference Shares :- Convertible Preference Shares are those preference shares which carry a right to be converted into equity shares.
Non-Convertible Preference Shares :- Non- Convertible Preference Shares are those preference shares which do not carry a right to be converted into equity shares.
(iv) With reference to redemption
Redeemable preference shares :- Redeemable preference shares are those preference shares the amount of which can be returned by the company to the holders of such shares after the time specified for their repayment or at a time earlier to it. The repayment of amount is termed as Redemption.
Irredeemable preference shares :- Irredeemable preference shares are those preference shares the amount of which cannot be returned by the company to the holders of such shares unless the company is wound up.
year to year depending upon the profits of the company. Equity shareholders may get higher dividend if the profits are large and may not get any dividend if there are no profits. Directors may or may not recommend dividend or such shares. That is why in financial terminology the share capital raised through such capital is called as Risk Capital.
Issues of shares
A company collects its capital by issue of shares. A public company can issue shares only after it has met the legal compliances that is obtaining certificate for
commencement of business, filing of prospectus with the registrar of companies, etc. A private company, on the other hand, does not have to meet any such legal compliances.
Terms of issue of Shares
Shares of a company may be issued in any of the following three ways:
1. Issue of shares par,
2. Issue of shares at a premium (section 78) and 3. Issue of shares at a discount (section 79).
The accounting treatment of issue of shares in case of each of the above is different.
1. Issue of shares at par : Shares are said to have been issued at par when an applicant has to pay sum equal to the face value of share,i.e., issue price Rs. 10 and face value is also Rs. 10.
2. Issue of shares at a premium (section 78) : Shares may be issued at an amount more than the face value, e.g., a Rs. 10 share may be issued, say, at Rs. 20. It is a case of issue of shares at a premium – the premium being Rs. 10 per share.
According to the Companies Act, the amount of the premium should be credited to securities premium account. Securities premium is treated as a capital receipt.
Accounting Treatment :
A company may collect the amount of securities premium in lump sum or in installments. Premium on shares may be collected by a company either with the application money or with the allotment money or even with one of the calls money depending on the terms of issues. If the question is silent, it is assumed that the amount of the securities premium becomes due along with the allotment money. The accounting treatment in different cases is:
(i) When amount of premium is payable with the application money, Journal entry passed on receipt of application money is:
Bank A/C ….Dr. [with the total application money To share Application A/C including premium money]
(ii) When the shares are allotted, the entry is :
Share Application A/C ….Dr. [With the total application money Payable including premium] To share capital A/C [with the application money payable towards share capital] To securities premium A/C [with the amount of premium paid with application money]
(iii) When amount of premium is payable with allotment money :- Suppose the amount due to an allotment is Rs. 60,000 including a premium of Rs. 10,000, the Journal entry is:
Share allotment A/C …Dr. Rs. 60,000
To share capital A/C Rs. 50,000 To securities premium A/C Rs. 10,000
(iv) When the amount due to allotment is received :- It should be credited to share allotment account by passing the following general entry:
Bank A/C …Dr. Rs. 60,000
3.
Issue of shares at a discount ( section 79) :- when shares are issued at a
price less than its face value, (nominal value or per value), it is said that shares are issued at a discount. For example, if a Rs. 10 share is issued for Rs. 9, then it is issued as a 10% discount. When shares are issued at a discount, the company suffers a loss. The discount allowed to shareholders is debited to an account titled discount on Issue of Shares Account. The entry is:Share Allotment A/C …Dr. [with the amount due] Discount on issue of Shares A/C …Dr. [with the amount of discount] To share capital A/C
Forfeiture of Shares
Forfeiture of shares means cancelling the share for non – payment of calls due to as a final action against the defaulting shareholder(s). If any shareholder does not pay the amount of a call, the company may exercise the power to forfeit those shares. Shares, however, can be forfeited only if the articles of association permits it. The company must first give a clear 14 days’ notice to the defaulting shareholder that unless he pays the amount due together with interest, if any, by the specified date, the shares are liable to be forfeited. If the shareholder still does not pay, the company may forfeit them by passing an appropriate resolution.
On forfeiture, the shares are cancelled to that extent the share capital is reduced but the amount already paid by the shareholders is not returned to him – it is forfeited. Of course, the account showing the unpaid call is also cancelled by a credit. The entry passed on forfeiture of shares is :
Share Capital A/C …Dr. [with called up amount] To Forfeited Shares A/C [with amount already received] To various unpaid calls A/C [with the amount which
Or becomes due but not paid for] Calls-in-arrear A/C
credited with the amount due but not paid by the shareholder(s) and forfeited shares account will be credited by the amount paid by the shareholder(s).
Forfeiture of Shares originally issued at a
premium
When the shares are issued at a premium and the amount for premium was duly paid
on the shares forfeited, it would remain in the ‘Securities premium Account’, i.e., amount received towards securities premium will not be cancelled and thus, Securities premium Account will not be debited at the time of forfeiture of shares. In other words, theamount of premium received on forfeited shares cannot be transferred to forfeited shares account. If, however, the amount of the premium has been credited to the securities premium account is debited for the premium in respect of the forfeited shares.
Forfeiture of Shares which were issued at premium :-
(a) If premium has been received
Share capital A/c …Dr. [amount called up and premium] To share allotment A/c [amount not received on allotment] To share calls A/c [amount not received on calls] To forfeited share A/c [amount received so far]
(b) If premium has not been received
Reissue of Forfeited Shares
Shares forfeited becomes the property of the company and the directors have the authority to reissue them at per, at premium or at a discount.
In case, they are issued at par, accounting entry will be:
Bank A/c …Dr To share capital A/c
In case they are issued at a discount, the discount cannot exceed the amount that had been received and forfeited. In other words, there cannot be any loss on account of reissue of forfeited shares. The journal entry is:
Bank A/c …Dr. [with the amount received on reissue] Forfeited shares A/c [with the discount allowed on reissue] To share capital A/c [with the amount credited as paid-up]
If the forfeited shares are reissued at a price higher than that paid - up, the excess is credited to securities premium account.
Reissue of Forfeited Shares originally issued at a discount :-
If shares originally issued at a discount are forfeited and thereafter reissued, the
maximum permissible reissue discount, is the sum received on forfeited shares and the original discount. For example, if a share of Rs. 10 was originally issued at a discount of Rs. 1 is forfeited, and the amount received on it was Rs. 2, the maximum discount on reissue of such a forfeited share can be Rs. 3 (i.e., original discount Re.1 + amount received Rs. 2). The journal entry will be as follows in case the share is reissued for Rs. 7 per share, fully paid – up :
Particulars Dr. (Rs.) Cr. (Rs.) Explanation
Bank A/c …Dr. 7 [with the amount received on reissue] Discount on issue of shares A/c …Dr. 1 [with the discount originally allowed] Forfeited shares A/c …Dr. 2 [ with the excess of reissue discount
When shares belonging to pro rata category are
forfeited
If some of the shares belonging to pro rata category are forfeited, the student faces the
problem of determining the amount in arrears on allotment. To reach correct solution, following procedure is recommended :1. Calculate total shares applied for by the shareholder whose share are being forfeited. Apply the formula :
Total shares applied × shares allotted by the company to shareholders
Total shares allotted
2. Multiply the number of shares as calculated in (1) with the amount of application money. This gives total money sent by the shareholder with the application. This amount is forfeited on default and credited to forfeited shares account.
3. Deduct from the application money received, the amount due on application with the help of shares allotted. The result is the excess application money sent by the
applicant in advance with the application. This money is available for adjustment towards allotment.
4. Calculate the amount due on allotment and deduct from it the amount sent in advance with application. The result is the amount in arrears on allotment. This amount is credited to share allotment account at the time of making entry for forfeiture.
Illustration
On 1st April , 2010, X Ltd. Made an issue of 3,00,000 equity shares of Rs. 10 each at a
premium of Rs. 4 per share, payable as follows:
Rs. 4 on application ( including Re. 1 premium )
Rs. 3 on allotment ( including Re. 1 premium )
Rs. 4 on first call ( including Re. 1 premium )
Application were received for 4,00,000 shares, of which applications for 50,000 shares were rejected and their money was refunded. Rest of the applicants were issued shares on pro rata basis and their excess money was adjusted towards allotment.
Hari, to whom 6,000 shares were allotted, failed to pay the allotment money and his shares were forfeited after allotment. Mohan who applied for 10,500 shares failed to pay the two calls and on his such failure, his shares were forfeited.
Shyam, who was allotted 3,000 shares did not pay final call.
12,000 forfeited shares were reissued as fully paid on receipt of Rs. 9 per share, the whole of Mohan’s shares being included.
JOURNAL ( Being the allotment money due on 3,00,000 shares)
Equity share capital A/c ( 6000 shares × 5 ) …Dr. Securities premium A/c ( 6000 × Rs. 1 ) …Dr. To equity share allotment A/c ( W.N. 1(b) )
To forfeited shares A/c
( Being 6000 shares of Hari forfeited for non – payment of allotment money)
Equity share first call A/c ( 2,94,000 shares × Rs. 4 ) …Dr. To equity share capital A/c (2,94,000 × Rs.3)
To securities premium A/c ( 2,94,000 × Rs.1) ( Being the first call money due on 2,94,000 shares )
Equity share second and final call A/c …Dr. To equity share capital A/c
To securities premium A/c
( Being the second and final call money due on 2,94,000 shares) Equity share capital A/c ( 9,000 × Rs.10) …Dr. Securities premium A/c ( 9,000 × Rs. 2) …Dr. To equity share first call A/c (9,000 × Rs.4)
To equity share second and final call A/c (9,000×Rs.3) To forfeited shares A/c
(Being 9,000 shares of Mohan forfeited for non-payment of calls) Forfeited shares A/c ( 12,000 × re.1 ) …Dr. To equity share capital A/c
BALANCE SHEET ON X LTD.
(b) Money due from Hari on allotment : Rs.
6,000 shares × Rs. 3 18,000
Less: Excess application money adjusted 4,000
Money due from Hari 14,000
(c) Money received on allotment:
Total amount due on allotment ( 3,00,000 × Rs. 3) 9,00,000 Less: Excess application money adjusted 2,00,000 7,00,000 Less: Money not paid by Hari (b) 14,000 Net amount received on allotment 6,86,000
Ab Mohan applied for 10,500 shares.
3,50,000
Therefore, he must have been allotted × 10,500 = 9,000 shares
3,00,000
He has not paid first and second call money. As such,
(a) First call money will be received on 2,94,000 shares – 9,000
Shares of Mohan = 2,85,000.
(b) Second call money will be received on 2,94,000 – 9,000 shares
of Mohan – 3,000 shares of Shyam = 2,82,000 shares.
23. Amount transferred to capital reserve:
12,000 shares have been reissued which include 9,000 shares of
Mohan and the balance 3,000 of Hari. Rs.
(b) Amount forfeited in respect of Hari’s shares Rs.22,000 × 3,000 ÷ 6,000
11,000
Less: Loss on reissue of 12,000 shares @ Re. 1 each 56,000
Profit on reissue to be transferred to capital reserve 12,000
44,000
4. Balance in forfeited shares account:
Profit on 6,000 shares of Hari Rs.22,000
Therefore, the balance of the forfeited shares A/c
On 3,000 unissued shares = Rs.22,000 × 3,000
6,000 Rs.11,000
It should be noted that forfeited amount of shares not yet reissued will be shown in the balance sheet as a part of capital.
CONCLUSION
With the expansion in the scale of operations and increase in risk involved, non-corporate forms of organizations ( i.e. sole proprietorship, partnership firms) found themselves unequal to the task of meeting all the capital requirements and
BIBLIOGRAPHY
1. Tulsian’s Accountancy [ P.C.Tulsian, class XII (CBSE), Tenth Edition, Part A ]
