Accounting for Share Capital [AHSEC Class 12 Accountancy Notes 2024 Updated]

 

AHSEC HS 2ND YEAR ACCOUNTANCY

PART – B  Company Accounts and Analysis of Financial Statements

(40 Marks)

Unit – 1 : Accounting for Share Capital

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Q.1. Answer the following questions:

(a) What is a company? Mention four features/characteristics of a company.

Ans. As the Companies Act, 2013 Sec 2(20), "A company is a company incorporated under this Act or any other previous Law." A company means an association of person registered under the law of the land and operate certain economic activities in order to earn profits. It has a legal entity separate from its members and has a perpetual succession with a common seal.

Justice Lindley defined a company as "An artificial person created by law with a perpetual succession and a common seal."

He further defined a company as "an association of many persons who contribute money or money's worth to a common stock, employed for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The person who contributed it or to whom it belongs are members. The proportion of capital which each member is entitled is his share. Share are always transferable though the right to transfer is more or less restricted." (Best ans to write)

Following are the features/characteristics of a company:

i. Voluntary association: A company is a voluntary association of many persons.

II. Legal Entity: It is a legal entity separate from its members.

iii. Perpetual succession: A company has a perpetual succession. It means that it is not affected by the death, lunacy or insolvency of any of its members.

iv. Common seal: A company is an artificial person. It acts through its directors who are the agents of the company. The directors act through the common seal.

v. Artificial Person: Unlike human beings, a company is an artificial person but it can make contracts like. us.

Q.2. State and briefly explain the different kinds of companies which can be formed under the Indian Companies Act.

Ans. Companies which can be formed under the Indian Companies Act are as follows:

a. Private Company and

b. Public Limited Company

a) Private Company: A Private Co. or Private Itd. Co. is one which puts the following restrictions by its Article of Association:

i. Restriction on transfer of shares: It puts a restriction on rights of its members to transfer their shares.

ii. Restriction on number of members: It limits the number of members i.e. minimum 2 and maximum is 200.

iii. Restriction on invitation to public for subscribe to its share capital: It is restricted that a Ltd. Co. cannot raise funds from general public or by subscribing its shares through general public.

iv. Important to use "Private Ltd.": It is compulsory for all private company that they have to use "Private Ltd." Or "Pvt. Ltd." (All these points can be features also)

b) Public Limited Company: According to section 2(71) of the Companies Act, 2013. A Public Company means a company which:

Is not a private company Has a minimum paid-up capital, as may be prescribed Is a private company subsidiary of public company

Q3. What is a share? Mention four characteristics of share. [AHSEC 2016,17,20]

Ans. Share capital of the company is divided into certain individual units of a fixed amount. These units are called share. So shares are the denominations of share capital of a company.

Section 2(84) of the Companies Act, 2013 defines- share in the share capital of the company and includes stock.

The Following are the characteristics of share are:

a) Interest in a company: A share is an interest of a compony. It measured in a sum of money.

b) transferability and heritability: Share are transferable and heritable subject to the regulations of the Articles.

c) Distinct number: A share must have a distinguishing number.

d) Movability: it is a movable property; it can be transferred.

Q.4. What are different types of shares? [AHSEC 2018,19]

Ans. Shares are of two types: [SEC-43(a)]

a. Equity share: An Equity share is a share which is not a preference share. It is held by Equity Share Holders and have no voting right and preferential right in getting dividend.

Features: Features of equity shares:

a) Equity shareholders are the primary/real owners of a company.

b) They have voting rights and decision making powers.

c) Rate of dividend varies depending on the availability of surplus funds.

d) They get dividend after dividend paid to preference shareholders.

b. Preference share: Preference share are those shares which are eligible for a fixed rate of dividend out of the profits of the company prior to any other class shareholders. The shareholders of this class of shares get preference as to

(a) the payment of dividend,

(b) repayment of capital before payment of capital to other class of shareholders in the event of winding up of the company.

Features: Features of preference shares:

a) Preference shareholders are secondary owners of a company.

b) They do not have voting rights except in special cases.

c) Rate of dividend is fixed in case of preference shares.

d) The get dividend before dividend paid to equity shareholders.

Q.5. What is sweat Equity share?

Ans. Sweat Equity share means Equity share issued by a company to its employees and directors. Such shares are generally issued at discount. These shares can be issued after one year from the commencement of the business of the company. It has come into force w.e.f. Oct 31, 1998.

Q.6. What is the meaning of minimum subscription of shares? [AHSEC-2022]

Ans. Minimum subscription of shares refers to the number of shares which, in the opinion of directors, should be subscribed for, by payment in cash in order to enable the company to run its business smoothly.

Q.7. What is the meaning of over subscription and under subscription? [AHSEC 2022,23]

Ans. Shares are said to be over-subscribed when the number of shares applied for is more than the number of shares offered to the public for subscription. For example, in case a company has offered. 1,00,000 shares to the public but the public applied for 1,50,000 shares, such situation is called over subscription.

Shares are said to be under-subscribed when the number of shares applied for is less than the number of shares offered to the public for subscription. For example, in case a company has offered 1,00,000 shares to the public but the public applied for 90,000 shares, such situation is called under-subscription.

Q.8. What is meant by issue of shares at premium?

Ans. Issue of shares at a premium means issue of shares at a price higher than its face value. For example, if the face value of a share is Rs.100 and the same is issued at Rs. 110, then it is said to be issue at premium.

Q.9. What is meant by issue of share at discount? Mention the provisions of Section 53 of the Companies Act, 2013 relating to issue of shares at Discount. When Can a company issue share at Discount? (IMP)

Ans. Issue of shares at a discount means issue of shares at a price lower than its face value. For example,

if the face value of a share is Rs. 100 and the same is issued at Rs. 90 then it is said to be issued at discount.

LEGAL PROVISIONS GOVERNING ISSUE OF SHARES AT A DISCOUNT

Section 53 of the Companies Act, 2013 prohibits issue of shares at discount:

a) A company cannot issue any shares at a discount except sweat equity shares U/s 54. [Section 53 (1)]

b) Any share issued by a company at a discount shall be void. [Section 53 (2)]

c) A Company can issue shares at a discount to its creditors when its debt is converted into shares or through debt structuring scheme as per RBI Guidelines. [Section 53 (2A)]

d) If the company contrivances the provisions of this section:

i. Company and every officer in default Penalty of amount equal to the amount raised through issue of shares at discount Or 5 Lakhs, whichever is less.

ii. Company is required to refund the amount alongwith interest @ 12% p.a. from the date of issue of shares.[Section 53 (3)]

However a company can issue its shares at discount in the following cases: (not prohibited)

a) Issue of Sweat Equity shares: Equity share means Equity share issued by a company to its employees and directors. Such shares are generally issued at discount. Under Sec 53(1), a company can issue its shares at discount if it is sweat equity share.

b) Issue of shares to creditors; A Company can issue shares at a discount to its creditors when. its debt is converted into shares or through debt structuring scheme as per RBI Guidelines. [Section 53 (2A)]

Q.10. What is buy Back of Share?

Ans. Buy Back of share means purchasing of equity shares by a company itself. Normally a company is allowed to purchase share of other companies out of its surplus money. But now a days a company can utilize its surplus money for purchasing of its own share under section 68 of the Companies Act, 1956.

Q.11. Mention the types of shares a public limited company in India can issue.

Ans. (i) Equity Share: Equity share are those shares which are not preference shares. According to section 43 of the Companies Act, 2013, "Equity share capital means all share capital which is not preference share capital."

(ii) Preference shares (sec 43 (b)(ii)): Preference shares are those shares which have preferential rights as dividend and repayment of capital.

Q.12. Distinguish between Equity share and Preference shares. [AHSEC-2009,12 IMP]

Ans. Differences between equity shares and preference shares:

Feature	Equity Shares	Preference Shares
Ownership	Owners are residual claimants; they have voting rights.	Owners have no voting rights, but they receive fixed dividends before equity shareholders.
Dividends	Dividends are not fixed; distributed based on company profits and board decisions.	Dividends are fixed, and priority is given over equity shareholders.
Risk	Higher risk as dividends are not guaranteed, and shareholders are last in line in case of liquidation.	Lower risk as fixed dividends are assured, providing a steady income.
Voting Rights	Equity shareholders have voting rights, allowing them to participate in company decisions.	No or limited voting rights; preference shareholders may only vote on matters directly affecting their interests.
Return on Investment	Potential for higher returns through capital appreciation and dividends.	Lower potential returns as dividends are fixed, but offers a stable income stream.
Convertible Option	Typically not convertible into other types of securities.	Some preference shares may be convertible into equity shares after a specified period.
Redemption	Not redeemable; repaid only during liquidation.	Redeemable; can be repaid after a specified period or at the company's discretion.
Priority in Repayment	Receives repayment after all other obligations in case of liquidation.	Enjoys priority in repayment of capital during liquidation, before equity shareholders.

Q.13. What is share capital? Mention the different kinds of share capital. [AHSEC 2014,2019]

Ans. Capital means fund. Share capital means the sum total of the nominal value of the share of the company. Share capital of two kinds-equity share, preference share.

Equity share- It is the sum total of nominal value of the equity share of the company.

Preference share-It is the sum total of the nominal value of the preference share of the company.

Q.14. State the purposes for which securities premium reserves can be utilizes. [AHSEC-12,13,20,22]

Ans. Under section 52, securities premium can be used for the following purposes:

a. For issuing fully paid bonus shares to the existing shareholders;

b. For writing off preliminary expenses;

c. For writing off expenses, commission and discount on issue of shares and debentures;

d. For providing for premium payable on redemption of preference shares and debentures.

e. For Buying back shares.

Q.15. What are capital reserve?[AHSEC-2022]

Ans. Capital reserves are those reserves which are created out of capital profits. Capital profits are those profits which are not earned in the normal course of the business. These reserves are not available for paying the dividends. Following capital profits are transferred to capital reserve:

a. Profit on sale of fixed asset.,

b. Profit on reissued of forfeited shares.

c. Profit prior to incorporation.

Q.16. What is reserve capital?

Ans. Reserve capital is an uncalled part of share capital which has to create by a company by adopting a special resolution. This part of capital can be called up only in the event of winding up of the company. The aim is to create this capital is to protect the interest of the creditors of the company.

Q.17. What is the meaning of re-issue of forfeited share? [AHSEC-2023] Explain the process of re-issue of forfeited share. [AHSEC-2018]

Ans. Re-issue of forfeited shares mean sold or otherwise disposed of the forfeited shares. The re-issue of forfeited shares may be either at par, at premium or at discount.

Process Of Re-issue Of Forfeited Share.

a. Once the Board of directors has forfeited the shares, the defaulting shareholder is asked to return the share certificate which is cancelled thereafter.

b. The board of directors passes a resolution allotting the forfeited shares to the new purchaser/ purchasers of such shares.

c. The number and denomination of shares to be re-issued is informed the stock exchange, if registered.

d. In case of reissue of shares neither a prospectus is issued nor any offer is otherwise made to the general public. Though the amount of such shares may be called in more than one instalment but usually the entire amount is called in one instalment i.e. lumpsum.

e. The board of directors of the company while reissuing the shares decide the price of reissue. These shares can be reissued at par, at premium or at discount. Generally, these shares are reissued at a discount

f. The amount of discount allowed at the time of reissue in no case should be more than the amount forfeited on such shares.

Q.18. Mention the distinction between Capital Reserve and Reserve Capital. [AHSEC-17,18]

Ans:- Distinctions between capital reserve and reserve capital:

Feature	Capital Reserve	Reserve Capital
Nature	Represents the accumulated profits that are not distributable as dividends and are set aside for specific purposes, such as future expansions, contingencies, or to write off capital expenses.	Represents a portion of the authorized share capital that the company does not issue immediately. It is set aside and can be issued later, usually during a financial crisis or for specific projects.
Source	Arises from profits, such as capital profits, premium on issue of shares, or profits from the revaluation of assets.	Derives from the share capital, specifically from the portion that the company has not issued to the public.
Usage	Used for various purposes, including the creation of a general reserve, writing off preliminary expenses, bonus issues, and meeting contingencies.	Remains unissued until needed. When issued, it becomes part of the share capital and can be used for specific purposes like issuing bonus shares or adjusting losses.
Distribution	Not distributable as dividends among shareholders; it is retained within the company.	Not distributable as dividends until it is converted into issued share capital. Once issued, it can be used for dividend distribution.
Examples	Revaluation reserve, securities premium reserve, capital redemption reserve.	Share premium account, contingency reserve.
Purpose	Preserves the financial health of the company, ensuring resources for future needs and maintaining stability.	Provides flexibility to the company by having unissued capital that can be utilized strategically when required.

Q.19. What is underwriting of shares?

Ans. Underwriting means taking the responsibility of selling shares/debentures by any person/firm. These persons are known underwriters firm which are not taken up by public. If share/debentures offered by a company are not taken up by a public, these are taken up by underwriter who pays for the shares/debentures not subscribed by the public.

Q.20. Mention six statutory books to be maintained by a company. [AHSEC-08,14] IMP

Ans. These books are:

a. Register & Index of members

b. Register & index of debenture holders 

c. Register of fixed assets

d. Minute of books of shareholders & debenture holders.

e. Register of mortgage & charges

f. Register of investment held and their name.

Q.21. Mention six statistical books to be maintained by a company. [AHSEC-08,14] IMP

Ans. Statistical books are:

i. Share application and allotment books.

ii. Share cail book.

iii. Register of share certificate.

iv. Share transfer certificate books.

v. Dividend books.

vi. Directors attendance book.

Q.22. Define preliminary expense with examples.

Ans. Any expenditure incurred at the time of formation of a company is called preliminary expenditure.

Examples are stamp duties, fees on registration, law cost, cost of advertising the prospectus, cost of printing of memorandum and articles of association etc.

Q.23. Give the main divisions of the share capital of the company and state the meaning of each of them. [AHSEC 2014,2019]

"or"

State the subdivision of the share capital of a company.

Ans. The share capital of the company may be divided into the following sub-divisions:

(i)Authorized or Nominal or Registered Capital: [AHSEC 2019,2020]It is the maximum amount of share capital which a company is authorized to raise from the public for the time being to carry on the business. It is mentioned in the capital clause of the Memorandum of Association.

(ii)Issued Capital: Issued capital is nominal value of the shares which are offered to the public for subscription for cash and shares issued to the vendors of the promoters for consideration other than cash.

(iii)Called up Capital: Called capital is that amount of the nominal value of the shares subscribed for which the company has asked its shareholders to pay by means of calls or otherwise.

(iv)Paid-up Capital: Paid up capital is that part of the called capital which is actually paid by the shareholders. It means the total amount paid by the shareholders on their shares.

(v) Reserve Capital; Reserve capital is an uncalled part of share capital which has to create by a company by adopting a special resolution.

[TO BE CONTINUE....]

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