Revision Notes The death insanity or insolvency of any member

of the company in no way affects the existence of

l Company: A company may be viewed as an the company. Members may come and go but the
association of persons who contribute money or company continues its operation.
money’s worth to a common inventory and use it for n Common Seal: The company being an artificial
a common purpose. It is an artificial person having person, cannot sign its name by itself. Therefore,
corporate legal entity distinct from its members every company is required to have its own seal
(shareholders) and has a common Scan this which acts as on official signature of the company.
seal used for its signature. Thus, it topic Any document which does not carry the common
has certain special features which seal of the company is not binding on the company.
distinguish it from the other forms n Transferability of Shares: The shares of a public
of organization. These are as limited company are freely transferable. The
follows: Types of permission of the company or the consent of any
n Body Corporate: A company Companies member of the company is not necessary for the
is formed according to the provisions of Law transfer of shares, but the Articles of the company
enforced from time to time. Generally, in India, can prescribe the manner in which the transfer of
the companies are formed and registered under shares will be made.
Companies Law except in the case of Banking and n May Sue or be Sued: A company being a legal
Insurance companies for which a separate Law is person can enter into contracts and can enforce the
provided for. contractual rights against others. It can sue and be
n Separate Legal Entity: A company has a separate sued in its name if there is a breach of contract by
legal entity which is distinct and separate from its the company or by the other party.
members. It can hold and deal with any type of n Kinds of Companies: Companies can be classified

property. It can enter into contracts and even open either on the basis of the liability of its members or
a bank account in its own name. on the basis of the number of members.
n Limited Liability: The liability of the members On the basis of liability of its members, the
of the company is limited to the extent of unpaid companies can be classified into the following
amount of the shares held by them. In the case of three categories:
the companies limited by guarantee, the liability of (i) Companies Limited by Shares: In this case, the
its members is limited to the extent of the guarantee liability of its members is limited to the extent of
given by them in the event of the company being the nominal value of shares held by them. It is also
wound up. known as a Joint Stock Company.
n Perpetual Succession: The company being an (ii) Companies Limited by Guarantee: In this case, the
artificial person created by law continues to exist liability of its members is limited to the amount they
irrespective of the changes in its membership. A undertake to contribute in the event of the company
company can be terminated only through law. being wound up. Thus, the liability of the members
will arise only in the event of its winding up.
(iii) Unlimited Companies: In other words, the rate, of the nominal value of each share before any
creditors can claim their dues from its members. dividend is paid to the equity shareholders.
Such companies are not found in India even though (b) The preferential right to the repayment of capital,
permitted by the Companies Act, 1956. on the winding up of the company to the preference
On the basis of the number of members, companies shareholders before anything is paid to the equity
can be divided into two categories as follows: shareholders.
(i) Public Company: A public company means a Types of Preference Shares:
company which: (A) On the basis of Arrears of Dividend
(a) is not a private company; (i) Cumulative Preference Shares: These are the
(b) has minimum paid up capital of ` 5 lakh preference shares which have the right to receive
rupees or such higher paid-up capital, as arrears of dividend in subsequent years and before
may be prescribed and; the payment of dividend to equity shareholders is
(c) is a company which is not a subsidiary of a made.
private company. (ii) Non-Cumulative Preference Shares: These are the
(ii) Private Company: A private company is one preference shares which don’t have the right to
which has a minimum paid up capital of ` 1 receive arrears of dividend in subsequent years.
Lakh rupees or such higher paid-up share (B) On the basis of Share in Profits
capital as may be prescribed, and which by its (i) Participating Preference Shares: These are the
articles: shares which are entitled to share in the surplus
(a) restricts the right to transfer its shares; profit of the company which remains after payment
(b) limits the number of its members to 200 to equity shareholders.
(excluding its employees); (ii) Non-participating Preference Shares: These are the
(c) prohibits any invitation to the public to shares which do not have a share in surplus profits
subscribe for any shares in or debentures of and on which only a fixed rate of dividend is paid.
the company. (C) On the basis of Convertibility
(d) prohibits any invitation or acceptance (i) Convertible Preference Shares: Convertible
of deposits from person other than its preference shares are those shares which can be
members, directors, and relatives. converted into equity shares.
(iii) One Person Company (OPC): Sec.2(62) of (ii) Non-convertible Preference Shares: These are the
the Companies Act, 2013, defines OPC as a preference shares which don’t have the right to be
“company which has only one person as a converted into equity shares.
member”. (D) On the basis of Redemption
Rule 3 of the Companies(Incorporation)Rules, (i) Redeemable Preference Shares: The preference
2014 provides that: shares which are repayable either after a fixed
(a) Only a natural person being an Indian period or earlier at the option of the company (as
citizen and resident in India can form one per provisions of Sec. 80) are called redeemable
person company. preference shares.
(b) It cannot carry out non-banking financial (ii) Irredeemable Preference Shares: Preference shares
investment activities. which don’t have any maturity date are called
(c) Its paid up share capital is not more than ` irredeemable preference shares. The Companies
50 Lakhs. Act, 2013, does not permit issue of irredeemable
(d) Its average annual turnover of three years preference shares.
does not exceed ` 2 crores. 2. Equity Shares: According to Section 43 (a) of The
l Share: According to Section 2(84) of the Companies
Companies Act, 2013, an equity share is a share
Act, 2013, share means a share in the share capital which is not a preference share. Equity shares are
of a company and includes stock. The capital of the most commonly issued class of shares which
company is divided into a number of equal units. carry the maximum ‘risks and rewards’ of the
Each unit is called a share. A company may divide business. The risks being losing part or all of the
its capital into share of ` 100, ` 50, ` 10, ` 5 or even value of shares if the business incurs losses, the
` 1 each. rewards being payment of higher dividends and
appreciation in the market value. The dividend
l Classes or Kinds of Shares
on equity shares is not fixed and it may vary from
1. Preference Shares: According to Section 43(b) of year to year depending upon the amount of profits
the Companies Act, 2013, preference shares are the available for distribution.
shares which carry the following two preferential
l Share Capital
rights:
Share capital means the capital raised by the
(a) Preferential right on dividend to be paid either as
company by the issue of shares.
fixed amount or an amount calculated by a fixed
 Types of Share Capital (7) Un-called Capital: It refers to that portion of the
The term Share Capital has been used in many allotted shares which has not been called up by the
forms in the Companies Act, therefore, the share company for payment.
capital has been divided into the following types: (8) Paid-up Capital: It is that portion of the called-up
(1) Authorised or Registered or Nominal Capital: It capital which has actually been paid up by the
refers to the maximum capital that a company can shareholders.
raise from the market. It is stated in the capital clause (9) Reserve Capital: Reserve capital refers to that
of Memorandum of Association of the company. portion of the subscribed capital which is not called-
A company cannot raise more capital beyond the
up for payment in its life time. Reserve capital is
authorised capital.  [Board 2023]
called up at the time of liquidation of a company by
(2) Issued Capital: It refers to that portion of the passing a special resolution.
authorised capital which is actually issued to the
l Private placement: A private placement is a sale
public for subscription.  [Board 2023]
of shares or bonds to pre-selected investors and
(3) Unissued Capital: It refers to that portion of the institution rather than the open market.
authorised capital which has not been issued to the
 [Board 2020, 2023]
public for subscription.
l Employee Stock Option Plan (ESOP): An ESOP is
(4) Subscribed Capital: It refers to that portion of the
issued capital which has been subscribed by the a grant to an employee giving the right to buy a
public. Subscribed capital can be more or less than certain number of shares in the company’s stock
the issued capital. for a set price.
l Sweat Equity: Sweat equity is ownership interest
(5) Allotted Capital: Capital allotted to share applicants
is called as allotted capital. It shall not exceed issued or an increase in value that is created as a direct
capital or applied capital (whichever is less.) result of hard work by the owner. Sweat equity is
a form of compensation by the owner. Sweat equity
(6) Called-up Capital: It refers to that portion of the
allotted shares which has been called-up by the is a form of compensation by the business to their
company for payment. owners and employees.

l Rights issue : It is an invitation to existing shareholders to purchase additional new shares in the company at a
discount to the market price.
Difference between Equity & Preference Share
Basic Equity Share Preference share
(i) Refund of capi- On winding up, the equity share capital On winding up, the preference share capi-
tal is paid after the preference share capital is tal is paid before the equity share capital is
paid or equity shareholder receive residual paid or preference shareholder have pref-
amount. erence to get refund of capital over equity
shareholders
(ii) 
Right of Dividend is paid on equity shares af- Dividend is paid on preference share be-
dividend ter payment of dividend on preference fore payment of dividend on equity shares.
shares.
(iii) Right of No fixed rate of dividend. It is decided Fixed rate of dividend prescribed on the
Dividend by board of directors every year and vary face of preference shares e.g. 9% Preference
periodically. these In this case rate of dividend is 9%.
(iv) Right to Vote Equity shareholder have the right to vote In normal course of business, preference
in meeting of shareholders and they elect shareholders do not enjoy the right to vote
director for managing the company. in the meetings of shareholders. But they
have it only in special circumstances.
(v) Redemption Equity share are not redeemable, however, Preference share are always redeemable.
a company may buy back its equity shares Now a company cannot issue irredeemable
as condition prescribed in section 68 of the preference shares.
Companies Act, 2013
Difference between Capital Reserve and Reserve Capital
Capital Reserve Reserve Capital
(i) it is a reserve that is created from the capital profits Reserve capital is defined as the capital that is uncalled,
of the company. i.e; this capital is called only in case of winding up of
company.

(ii) It is necessary to create a capital reserve. It is not compulsory to create a reserve capital.
 (iii) A capital reserve is used at the time of emergencies Reserve capital is the amount reserved by the company.
like inflation, incurring losses, etc. This amount is used for the events that will happen in
the future.
(iv) Capital reserves are created through capital Reserve capital is created out of authorised capital.
profits.
l Issue of Shares: At the time of First Call:
The amount on shares issued can be gradually (i) For making first call due:
collected in easy installments spread over a period Share First Call A/c Dr.
of time depending upon its growing financial To Share Capital A/c
requirement. The installments are (Being first call money due on …. shares @ ……..
Scan this
termed as application, allotment, topic per share)
first call, second call and final
call. However, this is in no way (ii) For receipt of first call:
prevents a company from calling Bank A/c  Dr.
the full amont on shares right at To Share First Call A/c
Issue of Shares
the time of application. (Being first call money received)
The important steps in the procedure of share issue At the time of Second Call:
are: (i) For making second call due:
(i) Issue of Prospectus Share Second Call A/c Dr.
(ii) Receipt of applications To Share Capital A/c
(iii) Allotment of Shares (Being second call money due on …… shares @
l Accounting treatment of Issue of shares for …… per share)
consideration of Cash: (ii) For receipt of second call:
a. Issue of Shares at Par: Issue of Shares at its actual Bank A/c Dr.
price i.e., face value is known as issue of shares at par.
To Share Second Call A/c
At the time of Application:
(Being second call money received)
i. For receipt of application money:
At the time of Third and Final Call:
Bank A/c Dr.
(i) For making third and final call due:
To Share Application A/c
(Being application money received on …….. shares Share Third and Final Call A/c Dr.
@............. per share) To Share Capital A/c
ii. For transferring application money to share capital: (Being third and final call money due on ……….
Share Application A/c  Dr. shares @ …….. per share)
To Share Capital A/c (ii) For receipt of Third and Final Call:
(Being application money transferred to share
Bank A/c  Dr.
capital account) To Share Third and Final Call A/c
Share Application A/c Dr.

(Being third and final call money received)
To Bank A/c
b. Issue of Shares at Premium: Issue of shares at a
(Being application money returned on rejected
premium implies that shares are issued at a price
application for……….shares)
which is more than their face value. For example,
At the time of Allotment:
if a share of ` 100 is issued at ` 120, ` 20 will be the
(i) For making allotment due: premium on share. As per the requirements of the
Share Allotment A/c Dr. Companies Act, 2013, the amount received on the
To Share Capital A/c securities premium shall be credited to Securities
(Being allotment due on …..shares @ …………. per Premium Reserve Account. It is a capital receipt for
share) the company.
(ii) For Adjustment of Excess Application Money:
According to Section 52(2) of the Companies Act,
share Application A/c Dr. 2013, the amount of Securities Premium Reserve
To share Allotment A/c can be used only for the following purposes:
(Being money on………shares @ `………per share (i) To issue fully paid-up bonus shares to the
adjusted to the amount due on allotment) shareholders.
(iii) For receipt of allotment money: (ii) To write off preliminary expenses of the companies.
Bank A/c Dr. .
(iii) T
o write off the commission paid or expenses on
To Share Allotment A/c issue of shares/debentures.
(Being allotment money received)
 (iv) T  o pay premium on the redemption of preference (2) For adjustment of Calls-in-Advance:
shares or debentures of the company. Calls-in-Advance A/c Dr.
(v) Buy-back of equity shares and other securities as To Share …. Call A/c
per Section 68. (Being the calls in advance transferred to the ___
Journal Entries call)
l Calls-in-Arrears
(1) For making Allotment due with Premium:
When a shareholder defaults to pay the amount of
Share Allotment A/c Dr.
call due within a specified period, then the unpaid
To Share Capital A/c amount is called Calls-in-Arrears. It is not necessary
To Securities Premium Reserve A/c to pass separate entry for the calls-in-arrears. But
(Being amount due on share allotment with if there is an instruction to open a calls-in-arrears
premium) account, then the following entries shall be passed:
(2) For receipt of Allotment Money: (1) For amount unpaid on allotment:
Bank A/c Dr. Calls-in-Arrears A/c Dr.
To …. Share Allotment A/c
To Share Allotment A/c
(Being amount not paid accrued on share allotment)
(Being share allotment money received)
(2) For amount unpaid on calls:
l Under-subscription of Shares: When the number of
Calls-in-Arrears A/c  Dr.
shares applied for is less than the number of shares To …. Share… Calls A/c
offered for issue, it is known as under-subscription. (Being amount not paid accrued on share ____ call)
This is subject to the qualification that minimum
subscription has at least been received. Application (3) For receipt of arrears of allotment or calls money:
for at least 90% of the shares must be received Bank A/c  Dr.
otherwise the issue becomes void according to SEBI. To Calls-in-Arrears A/c
l Oversubscription of Shares: When the number of (Being amount not received on call/allotment duly
shares applied for is more than the number of shares received)
offered for issue, it is known as oversubscription. l Issue of shares for consideration other than cash
The options available with the company to deal A company may issue shares for consideration other
with money received on oversubscription are: than cash by acquiring some assets for running
(i) Board of Directors can make full allotment to some business or to the promoters for rendering services
applicants and totally reject the others. to the company. Such issue of shares is termed as
(ii) They can make a pro-rata allotment. It means the issue of shares for consideration other than cash as
proportion is determined by the ratio which the there is no receipt of cash for the issue of shares.
number of shares to be allotted bear to the number Such issue may be either at par or at premium.
of shares applied for. The number of shares to be issued is calculated as
(iii) They can adopt a combination of the above two follows:
alternatives. Amount Payable
l Calls-in-Advance
No. of shares to be issued =
Issued price of share
A company can accept advance payment from any
These can be issued as fully paid shares for
shareholder in respect of the shares held by them
consideration other than cash, in the following
although calls have not been made on them, if it
circumstances:
is authorized by its articles, i.e., a shareholder may
pay the whole or a part of the unpaid amount as (A) Issue of Shares to Promoters: A company may issue
calls-in-advance although it has not been called shares without cash to its promoters for the services
up. This is called Calls-in-Advance and a separate rendered by them. The entry in this case will be:
account having this title is opened. Incorporation Expenses A/c Dr.
FUNDAMENTAL FACT To Share Capital A/c
(Being fully paid shares issued to the promoters)
Berkshire Hathaway is the world’s costliest stock,
costing you over ` 2 crore. Incorporation or Formation Expenses Account
is debited on the assumption that promoter’s
Then the calls are made, i.e., due, then it is adjusted activities have resulted in forming the company
against the respective ‘Calls A/c’. The company into a profitable unit.
may pay interest on such advance from the date (B) Issue of Shares to Vendors: When a company
of advance received up to the date when it is due, purchases certain assets from vendor/supplier on
which shall not be exceeding 12% per annum. credit, or when it purchases a business instead of
In this regard, the following entries are made: making payment to vendor in cash, the company
(1) For receipt of Calls-in-Advance: issues fully paid shares to the vendor. Shares may
Bank A/c Dr. be issued to vendor at par or at premium. Following
To Calls-in-Advance A/c entries are passed in this case:
(Being amount received in advance for the ___ call)
 (i) (a) For Purchase of Assets from Vendor: (ii) For Issuing Shares to Vendor:
Sundry Assets A/c Dr. (a) At Par:
To Vendor’s A/c Vendor’s A/c Dr.
(Being assets purchased on credit) To Share Capital A/c
(b) For Purchase of Business: (Being fully paid shares issued to vendor)
Sundry Asset A/c  Dr. (b) At Premium:
Goodwill A/c  Dr. Vendor’s A/c Dr.
To Liabilities A/c To Share Capital A/c 
To Vendor’s A/c To Securities Premium Reserve A/c
To Capital Reserve A/c (Being shares issued to vendor at premium)
(Being business purchased)

Example-1
Q. K Ltd. took over the assets of ` 15,00,000 and liabilities of ` 5,00,000 of P Ltd. for a purchase consideration of
` 13,68,500. ` 25,500 were paid by issuing a promissory note in favour of P Ltd. payable after two months
and the balance was paid by issue of equity shares of ` 100 each at a premium of 25%.
Pass necessary Journal Entries for the above transactions in the books of K Ltd.
Ans. Step 1. Calculation of profit or loss on purchase of a business:
Purchase consideration = `13,68,500
Value of the business = `15,00,000 – `5,00,000 = `10,00,000
Purchase consideration > Value of the business
Hence, the excess of purchase consideration (`13,68,500 – `10,00,0000 = `3,68,500) will be debited to goodwill
account.
Step 2: Calculation of number of shares to be issued to P Ltd.:
Purchase consideration = `13,68,500
Bills payable issued = `25,500
Remaining amount of which shares are to be issued = `13,68,500 - `25,500 = `13,43,000
Face value of each share = `100
Premium = 25 % of `100 = `25
Number of shares issued = `13,43,000/125 = 10,744 shares
Step 3. In the Books of K Ltd.
Journal Entries
Amount Amount
Date Particulars L.F.
Dr. (`) Cr. (`)
(i) Sundry Assets A/c Dr. 15,00,000
Goodwill A/c (Bal. Fig.) Dr. 3,68,500
To Sundry Liabilities A/c 5,00,000
To P Ltd. 13,68,500
(Being Assets and Liabilities acquired)
(ii) P Ltd. Dr. 13,68,500
To Bills Payable A/c 25,500
To Equity Share Capital A/c 10,74,400
To Securities Premium Reserve A/c 2,68,600
(Being promissory note accepted and equity shares issued at a
premium of 25%)

l Forfeiture of Shares:
When a member fails to pay allotment or calls of the issue price of his shares within a stipulated time then the
company has a power to cease his membership and forfeit his shares. Statutory provisions regarding forfeiture
of shares:
l Accounting Treatment
Following entries are passed in three alternative circumstances:
(1) Forfeiture of Shares issued at Par:
Share Capital A/c Dr. (amount called up so far)
To Share Allotment A/c (amount not received on allotment)
To Share Calls A/c (amount not received on calls)
To Shares Forfeiture A/c (amount received so far)
(Being shares issued at par forfeited)