CORPORATE ACCOUNTING - University Of Calicut

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CORPORATEACCOUNTINGSTUDY MATERIALB.COMIII SEMESTERCORE COURSECU CBCSS(2014 ADMISSION ONWARDS)UNIVERSITY OF CALICUTSCHOOL OF DISTANCE EDUCATIONTHENJIPALAM, CALICUT UNIVERSITY P.O. MALAPPURAM, KERALA - 693 635329AUNIVERSITY OF CALICUT

School of Distance EducationUNIVERSTY OF CALICUTSCHOOL OF DISTANCE EDUCATIONStudy MaterialIII Sem B.ComCore CourseCorporate Accounting2014 Admission OnwardsPrepared by:VIJESH VENUGOPALAsst.Professor in CommercePost Graduate Department of Commerce & Management StudiesN.S.S College Nemmara, Palakkad- 678508Scrutinised by:SRI K.O.FRANCIS,Associate Professor,Department of Commerce,Christ College,Irinjalakuda.(Chairman,Board of Studies in Commerce UG)Type settings and Lay outComputer Section, SDECorporate Accounting ReservedPage 2

School of Distance EducationINDEXMODULE IACCOUNTING FOR SHARE CAPITALMODULE IIFINAL ACCOUNTS OF LIMITEDLABILITY COMPANIESMODULE III ACCOUNTING FOR AMALGAMATIONAND INTERNAL RECONSTRUCTION55789MODULE IVFINAL ACCOUNTS OF BANKINGCOMPANIES110MODULE VFINAL ACCOUNTS OF INSURANCECOMPANIE131Corporate AccountingPage 3

School of Distance EducationCorporate AccountingPage 4

School of Distance EducationMODULE – 11.1 ACCOUNTING FOR SHARE CAPITALA company organisation grew out of the limitations and drawbacks of earlier forms oforganisations – Individual proprietorship, Partnership, etc. A company represents the third statein the evolution of business organisations. The increased need of modern industry and commercecould not be fulfilled by the earlier organisations. Thus most of the large scale industries orbusiness establishments are organised as Joint Stock Company.DEFINITIONA company is a voluntary and autonomous association of certain persons with capital dividedin to numerous transferable shares formed to carry out a particular purpose in common. It iscreated by following a process of law. It is an artificial person; it is invisible and intangible.According to Section 3(1) (i) of the companies Act 1956 defines a company as “company formedand registered under this act or an existing company”.CHARACTERISTICS OF A COMPANYa.b.c.d.e.f.g.Separate legal entity – It is a distinct legal person existing independent of its members.Limited Liability – Liability of the members is limited to the extent of the face value ofshares held by them.Separation of ownership and management – Though a company is an artificial person yetit acts through human beings who are called directors of the company. There is a divorcebetween ownership and management.Capital Contribution – Capital is contributed by persons called shareholders in the nameof shares and the share capital can be increased or reduced only in accordance with theprovisions of the Indian Companies Act.Distribution of Profit – Profit is distributed according to the provisions of the articles bythe directors.Transferability of shares – The shares of a company are freely transferrable except in caseof a private limited company. Transferability of shares has given perpetual succession to acompany.Common seal – A company being artificial personality, it acts through natural persons,called directors and its distinct existence is evidenced by a common seal.KINDS OF COMPANIESON THE BASIS OF INCORPORATIONa.b.c.Chartered company- Companies which are incorporated under a special charter by RoyalCharter which lays down objectives, rights, duties etc. Of the companies are known asChartered companies. For example, East India CompanyStatutory company - Companies which are brought into existence and governed by specialActs of the legislature are known as statutory companies. For example, RBI, LIC, UTI etc.Registered company - Companies which are formed and registered under the CompaniesAct 1956 or registered under the previous companies Act.ON THE BASIS OF LIABILITYa.b.c.Limited company- A company in which the liability of each member is limited to theextent of face value of shares held by him such company is called companies limited byshares.Guarantee company- Where the liability of the members of a company is limited byMemorandum to a fixed amount which the members undertake to contribute to the assets ofthe company in case of its winding up, the company is called Guarantee Company.Unlimited company- Unlimited companies are companies not having any limit on theliability of its members. In the event of winding up, the members are liable to the full extentof their fortunes to meet the obligations of the company.Corporate AccountingPage 5

School of Distance EducationON THE BAIS OF PUBLIC INVESTMENTa. Private company- A private company means a company which by its articlesa)Restricts the transfer of its sharesb) Number of members to two hundred c)Prohibits any invitation to the public for any shares d) Prohibits acceptance ofdeposits from the persons.b. Public company- Public companies are those companies which are not privatecompanies. All the above four restrictions are not imposed on such companies.COMPANIES DEEMED TO BE PUBLICA private company will be deemed to be a public company in the circumstances given below:1. If 25% or more of its paid-up capital is held by one or more bodies corporate, or2. If it holds 25% of the paid up capital of a public company, or3. If its average annual turnover is not less than rupees ten crores subject to change inceiling, or4. If it invites deposits from the public or renews deposits from the public other than itsmembers, directors or their relatives.SHARE CAPITAL OF THE COMPANYCapital is essential for a trading concern. A company collects capital by inviting the public tobuy its shares through a document known as prospectus. The capital is usually divided intodifferent units with definite value called shares. Section 2(46) of the companies act defines ashare as “a share in the share capital of the company and includes stock except where adistinction between stock and share is expressed or implied”. A share is not a sum of money butis an interest measured by a sum of money, and made up of various rights contained in thecontract. A share is a fractional part of the share capital which forms the basis of ownership in acompany.Share capital refers to the amount of capital raised or to be raised by a company by the issueof shares. The main divisions of share capital are as follows:1. Authorised capital - The amount of capital with which the company intends to beregistered is called Nominal or Registered or Authorised capital. It is the maximumamount which the company is authorised to raise by way of public subscription.2. Issued capital – The part of the authorised capital which is offered to the public forsubscription is called issued capital.3. Subscribed capital – It is that part of the issued share capital which is actually taken upby the public. If the whole issued share capital is not subscribed for by the public, thebalance of the issued share capital is called unsubscribed share capital.4. Called up capital – It is that portion of the subscribed capital which has been called upby the company. The difference between subscribed capital and called up capital isknown as uncalled capital5. Paid up capital – It represents the amount received against the calls made on the shares.The unpaid balance of the called up capital is known as calls in arrears.6. Reserve capital – Under Sec 99, Reserve capital is the amount of uncalled capital whichthe company has, by special resolution, decided not to call up except in the event ofwinding up of the company; reserve capital is available only to the creditors at the time ofwinding up of the company. Whereas Capital reserve is the capital profit earned by thebusiness, not by the normal trading concerns. Capital reserve cannot be distributed asdividend to share holders. Eg. Share premium, profit prior to incorporation, forfeitedshares a/c.etc.Corporate AccountingPage 6

School of Distance EducationTYPES OF SHARESThe shares which can be issued by a company are of two types - Preference shares andEquity shares.1.PREFERNCE SHARESThe preference shares are those which have some preferential rights over the other types ofshares. A share to be preference share must have two preferential rights:a. They have a preferential right to be paid dividend during the life time of the company.b. They have a preferential right to the return of capital when the Company goes in toliquidation.The preference shares are of the following types:1. Cumulative and Non - cumulative Preference shares – Cumulative preference shares arethose its dividend accumulated until it is paid off. The arrears of one year are carriedforward to next year. If dividend not to accumulate and carried forward to next year arecalled non-cumulative preference shares. Preference shares are always cumulative unlessotherwise stated.2. Convertible and Non-Convertible Preference shares - The holders of the shares have aright to get their preference shares converted into equity shares within a certain period iscalled Convertible preference shares. If the preference shares cannot be converted in toequity shares then it is said to be Non- convertible preference shares.3. Participating and Non-participating preference shares - In addition to the fixeddividend, balance of profit (after meeting equity dividend) shared by some preferenceshares. Such shares are participating preference shares. The holders of the preference sharesare entitled to a fixed dividend and not in the surplus profits; they are called Nonparticipating preference shares.4. Redeemable and Irredeemable preference shares – If preference shares are returned aftera specified period of time to share holders are called redeemable preference shares. Ifpreference shares are not redeemed (it is continue till the winding up) known asirredeemable preference shares.2.EQUITY SHARESEquity shares, with reference to any company limited by shares, are those which are notpreference shares [(Sec. 85(2)]. Equity shares are also known as Ordinary shares. Equity shareholders will get dividend and repayment of capital after meeting the claims of preference shareholders. There will be no fixed rate of dividend to be paid to the equity shareholders and its ratemay vary from year to year. The rate of dividend is determined by the directors of the company.SWEAT EQUITY SHARESweat equity share means the equity shares issued by a company at a discount or forconsideration other than cash for providing know-how or making available rights in the nature ofintellectual property rights.STOCKAs per Section 94(1) (c) of the Companies Act, 1956, when all the shares of a company havebeen fully paid up, they may be converted in to stock if so authorised by the articles ofassociation. It is another type of unit of share capital of a company. Share capital of a companycannot be offered directly in the form of stock. Stock is a consolidation of fully paid shares. It isa set of shares put together in a bundle and stock has no definite value.Corporate AccountingPage 7

School of Distance EducationDifference between shares and stockSharesShares may be fully or partly paid up.StockFor the purpose of conversion into stock, sharesmust be fully paid up.It is not possible to transfer fractions of Stock may be split up into fractional parts anda share.transferred as such.Shares are distinctively numbered.Stock bears no such number.It is originally issued by a company.Stock cannot be issued originally.It may be always registered.It may or may not registered.Shares are individual units of the capital Stocks are aggregate of fully paid up shares.of a company.1.2.3.4.5.6.7.8.ISSUE OF SHARESWhen a public limited company gets the certificate of incorporation, it issues aprospectus or a statement in lieu of prospectus inviting public to subscribe to the share capital ofthe company. That is the invitation is made through a document called prospectus. Theprospectus is simply an invitation to an offer but is not an offer. If one is interested, application,which is prescribed and printed by the company, is filled, signed and sent to the company alongwith the prescribed application amount. These applications are considered by the Board ofdirectors who take decision as to their acceptance or rejection, within a reasonable time. If theshare applications are accepted by the company then shares are allotted and thereby, there arisesa contract between the company and the applicant. That is, allotment results in a binding contractbetween the company and the prospective shareholders. The allotment must be communicated tothe person making the application so that it is legally complete. From the accounting point ofview, the following may be noted:Every prospectus must mention the number of shares issued i.e. offered to the public.The excess applications received over the issued shares are to be rejected;Prospectus must mention the minimum subscription. No allotment shall be made unless theamount stated in the prospectus as minimum subscription has been subscribed and the sumpayable on application for the amount so stated has been paid in cash and received by thecompany. The minimum amount of share capital is determined to cover 1) the purchase price ofany property purchased or to be purchased, 2) preliminary expenses, 3) money borrowed for theforegoing matters and 4) working. If this minimum capital is not applied for, share cannot beallotted. As per the SEBI’s guidelines the minimum application money to be paid shall not beless than 25% of the issue price. Statutory minimum application money as per Section 69(3) ofthe Companies Act is 5% of the nominal value of shares. Hence, 25% of the issue price cannotbe less than 5% of the nominal value of shares.Each application for shares must be accompanied by the prescribed application money. Theapplication money must not be less than 5% of the nominal value of each share.All application money must be kept intact in a scheduled bank and should not be used unless acertificate of commencement of business from the registrar has been obtained.If the allotment takes place, a letter of allotment is sent to the allottees. If no allotment of share ismade, a letter of regret together with application money is sent to the applicants.The directors make the allotment of shares on the basis of the application. The directors reservethe right to allot less number of shares applied for or to reject an application at their discretion.On allotment, the allottee has to pay a part of the amount of the face value of the shares calledallotment money. After the receipt of the allotment money, the company issues Share Certificate.The balance due on shares may be called by the company in instalments. Each such instalment iscalled a Call and the amount payable is known as call money, between two calls there must be agap of one month.Share capital Suspense Account – Application money received on shares is transferred to sharecapital account on allotment of shares. But if the Balance sheet of the company is to be preparedCorporate AccountingPage 8

School of Distance Educationafter receipt of the application money but before allotment of shares, it will not be proper toshow the application money as share capital because shares have not yet been allotted. In such acase, the application money received may be shown as share capital suspense account under thehead share capital till the shares is allotted.BOOK BUILDINGBook building is a process of fixing price for an issue of securities on a feedback frompotential investors based upon their perception about a company. It involves selling an issuestep-wise to investors at an acceptable price with the help of a few intermediaries/merchantbankers who are called book runners. Under book building process, the issue price is notdetermined in advance, it is determined by the offer of potential investors.EMPLOYEES STOCK OPTIONEmployees stock option means the option given to the whole time directors, officers oremployees of a company, which gives such directors , officers, or employees the benefit or rightto purchase or subscribe at a future date , the securities offered by the company at a predetermined price.ISSUE OF SHARES AT DIFFERENT VALUESShares may be issued at a price which is termed as: (i) at par; (ii) at a premium; and (iii) at adiscount(i) At par – if the price required to be paid to the company for the share is equal to the nominalvalue of that share, it is called issue at par, e.g., a Rs. 10 equity share issued at a price of Rs.10(ii) At a premium – if the price required to be paid to the company for the share is more than thenominal value of that share, it is called at a premium , e.g., a Rs. 10 equity share issued at aprice of Rs.15(iii) At a discount – if the price required to be paid to the company for the share is less than thenominal value of that share, it is called at a discount, e.g., a Rs.10 equity share issued at a priceof Rs.8Accounting Treatment of Issue of SharesSpecimen Journal Entries1. On receipt of application money:Bank A/cDrTo Share Application A/c2. On transferring of application money to capital accountShare application A/cDrTo Share Capital A/c3. On allotment money due:Share allotment A/cDrTo Share capital A/c4. On receipt of allotment money:Bank A/cDrTo Share allotment A/c5. On making first call due:Share first call A/cDrTo Share capital A/c6. On receipt of first call money:Bank A/cDrTo Share first call A/c7. On making second call due:Share second call A/cDrTo Share capital A/c8. On receipt of second call money:Bank A/cDrTo Share second call A/cCorporate AccountingPage 9

School of Distance Education9. On making final call due:Share final call A/cTo Share capital A/c10. On receipt of final call money:Bank A/cTo Share final call A/cDrDrIllustration - 1The authorised capital of a limited company is Rs. 2,00,000 divided in to 20,000 equityshares of Rs.10 each. Out of these, 15,000 shares have been issued to the public, payable Rs. 2on application, Rs. 4 on allotment, Rs. 2 on first call and Rs. 2 on second and final call. Passnecessary journal entries and prepare Balance sheet. All amounts have been duly received.SolutionJournal entriesBank A/cDrTo Equity Share Application A/c(Receipt of Application money on 15000 shares @ Rs. 2/share )Equity Share application A/cDrTo Equity Share Capital A/c(Transfer of application money to share capital)Equity Share allotment A/cDrTo Equity Share capital A/c(Allotment money due on 15,000 shares @ Rs.4 per share)Bank A/cDrTo Equity Share allotment A/c(Allotment money received)Equity Share first call A/cDrTo Equity Share capital A/c(First call money due on 15,000 shares @ Rs.2 per share )Bank A/cDrTo Equity Share first call A/c(First call money received)Equity Share final call A/cDrTo Equity Share capital A/c(Final call money due on 15,000 shares @ Rs.2 per share )Bank A/cDrTo Share final call A/c(Final call money received)Corporate 0,000Page 10

School of Distance EducationLiabilitiesAuthorised Capital20,000 Equity shares of Rs. 10AssetsCash at Bank1,50,0002,00,000eachIssued, Subscribed, called up and1,50,000paid up capital15,000 Equity shares of Rs. 101,50,0001,50,000each fully called upCalls in ArrearsIt often happens that some share holders fails to pay the allotment / call money due bythem to the company. The total of such unpaid amount is known as calls in arrears. Though it isan outstanding asset, it is not shown on the asset side of the balance sheet; instead it is shown asa deduction from called up capital on the liability side of the balance sheet. Where a companymaintains calls in arrears account, the journal entry is as follows:Calls in Arrears A/cDrTo Share allotment /Particular Call A/cOn calls in arrears, if there is a provision in the articles of the company, directors maycharge interest @ 5% for the period between the day fixed for payment of allotment or callmoney

corporate accounting study material b.c om iii semester core course cu cbcss (2014 a dmission o nwards) university of calicut school of distance education thenj ipalam, calicut university p.o. malappuram, kerala -693 635

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