A company is a voluntary association of people who contribute money for a common purpose. A company is an artificial person and a separate legal entity. Let us now understand the basic concepts of company accounts. The contribution of money by people forms the capital of the company and the contributors are its members. Hence, the capital of a company is known as share capital and the contributors as shareholders. Indian Companies Act, 2013 governs all companies and provides guidelines for them to adhere to.
Basic Concepts of Company Accounts
Meaning of Shares
Section 2(84) of the Companies Act, 2013 defines share as a share in the share capital of a company and it includes stock. The share capital of a company is divided into units of smaller denominations. Each such unit is called a Share. It entitles the holder to ownership in the company.
Browse more Topics under Introduction To Company Accounts
- Issue of Shares for Cash
- Issue of Shares for Consideration
- Under and Over Subscription
- Issue of Shares to Promoters
- Forfeiture of Shares
- Reissue of Shares
- Issue of Debentures
- Issue of Debentures as Security
- Issue of Preference Shares
- Capital Redemption Reserve Account
Types of share capital
As per Section 43 of the Companies Act, 2013 Share Capital of a company can be of two types:
- Equity Share Capital
- Preference Share Capital
(source – icai)
Equity Share Capital
It consists of equity shares. Equity Shares are shares which are not Preference Shares. These carry maximum ‘risks and rewards’ of the business. In the case of high profits, they receive a payment of higher dividends and appreciation in the market value of the shares.
While, in the case of loss, there exists a higher risk of losing part or all the shares. Equity Share Capital may be with the voting rights or with the differential rights related to dividend, voting or any other right.
Preference Share Capital
Preference Share Capital consists of preference shares. As per Section 43(b) of the Companies Act, 2013, preference shares are shares which carry preferential rights. The preferential rights of preference shares are:
- Preferential right to receive dividend: This implies that the company will first make payment to a person holding preference shares at fixed rate or amount and then to the equity shareholders. Thus, they receive dividend before Equity Shareholders.
- Preferential right to repayment of capital: On the winding up of the company they receive the repayment of capital before paying the equity shareholders.
Deemed Preference Share Capital
The capital will be deemed to be preference share capital when it has either or both of the following rights:
- In addition to the preferential right to payment of dividend, it possesses a right to participate. However, the right to participate may be fully or to a limited extent.
- In addition to the preferential right to repayment of capital, it possesses a right to participate. However, the right to participate may be fully or to a limited extent.
(source – novojurislegal)
Types of Share Capital shown in the Balance Sheet
Authorized or Nominal Capital
It is the amount of capital with which a company registers itself and also states this amount in the Memorandum of Association. It is the maximum amount of capital beyond which a company cannot issue shares to the public.
However, a company may issue shares of an amount more than the Nominal Capital, if it increases the Nominal Capital by altering the Capital clause in the Memorandum of Association.
It is the amount of capital which a company offers to the public for subscription. Also, it includes the shares that a company allotted to the vendors or promoters of the company for consideration other than cash.
In the Balance Sheet, under the head Issued Capital, a company needs to state the different classes of share capital including the sub-classes of the preference shares, the date and the terms of the redemption or conversion of redeemable preference shares and any option on un-issued share capital.
It is the amount of capital for which the company receives the subscription from the public and makes the allotment to them. It can be equal to or less than the Issued Capital.
It is the amount which the company calls from the shareholders to pay on the shares. Usually, a company does not call the full amount at once from the shareholders.
Hence, the portion that the company calls is called-up capital and the remaining portion is un-called capital.
It is the amount that is paid by the shareholders. This is the amount that we include in the Balance Sheet total. It may be less than or equal to the paid-up capital.
Solved Example For You
Explain the various classes of preference shares.
Ans. The various classes of Preference shares are:
- Cumulative Preference Shares: These are Preference Shares which carry right to receive arrears of dividend before the company makes payment to Equity Shareholders.
- Non- Cumulative Preference Shares: These are Preference Shares which do not carry the right to receive arrears of dividend.
- Participating Preference Shares: The Articles of Association may provide that after paying the dividend to the Equity Shareholders, the Preference shareholders will also have a right to participate in the remaining profits. Thus, the Preference Shares carrying this right are Participating Preference Shares.
- Non-Participating Preference Shares: These are Preference Shares which do not carry the right to participate in the profits remaining after paying the Equity Shareholders.
- Convertible Preference Shares: These Preference Shares have a right to conversion into Equity Shares.
- Non-Convertible Preference Shares: These Preference Shares do have a right to conversion into Equity Shares.
- Redeemable Preference Shares: These Preference Shares are redeemable by the company at a specific time (not exceeding 20 years from the date of issue) for the repayment.
- Irredeemable Preference Shares: These are not redeemable and thus, the company pays the amount only at the time of the winding up of the company.