Corporate Accounting

SHARE ACCOUNTING
Meaning, Nature and Characteristics of a Company . A company or a joint stock company is a voluntary association of individuals for undertaking (usually) a business venture, having a capital divided into transferable shares, the owners of which are known as shareholders. It is an artificial person created through a process of law, having a corporate and legal personality distinct and separate from its members, perpetual succession and a common seal. The essential characteristics of a company are: (i) It is a voluntary association of individuals through a process of law for undertaking (usually) a business venture. (ii) It is an artificial legal person created by law. (iii) It has a separate legal entity. (iv) It has a perpetual succession, i.e., it can be created and wound up by law only. (v) It has a common seal. (vi) The members have limited liability to the extent of the face value of shares held by them. (vii) The shares of a company can be transferred from one person to another. (viii) There is a separation of management from ownership. Meaning and Categories of Share Capital Share capital means the capital raised by the issue of shares. Share Capital of a company may be: (i)Nominal/Registered/Authorized Capital: It is the capital with which the joint stock company is registered and it indicates the maximum amount of capital a company can issue in the future. (ii)Issued Capital: It is that part of authorized capital which is offered for subscription. (iii) Subscribed Capital: It is that part of the issued capital which is subscribed by the public. (iv) Called up Capital: It is that part of subscribed capital which is called up by the company, (v) Paid up Capital: It is that part of called up capital which is paid up by the shareholders. (vi) Reserve Capital: It is that part of the uncalled capital which the company by passing a special resolution, may reserve to be called only upon winding up of the company. Nature and Classes of Shares The capital of the company can be divided into different units with definite value called shares. Holders of these shares are called shareholders or members of the company. There are two types of shares which a company can issue, i.e., (i)Preference Shares and (ii) Equity Shares (i) Preference Shares: Preference shares are those shares which carry these two rights: 1. The right to receive dividend at a specified rate before any dividend is paid to equity shareholders. 2. The right to return of capital in the winding up of the company before the equity shareholders. A company is allowed to issue only Redeemable class of Preference Shares.

(ii)Equity Shares: Shares which are not preference shares are equity shares. In other words, equity shares are those which are entitled to dividend and repayment of capital after claims of preference shares are satisfied. Equity shareholders have voting rights and thus have control of the company. They undertake the maximum risk.

Issue of Shares Different terms used in connection with the issue of shares are: Issue of Shares at par: Shares are said to be issued at par when they are issued at a price equal to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has been issued at par. Issue of Shares al Premium (Sec. 78): When shares are issued at a price higher than the face value (also called par value or nominal value), it is called 'issue of shares at a premium'. Excess of issue price over the face value is the amount of premium; it is a capital profit for the company and the amount so earned has to be credited to a separate account called 'Securities Premium Account'.. Issue of Shares at a Discount (Sec. 79). Shares are said to be issued at a discount when they are issued at a price lower than the face value. Over-Subscription of Shares: When the company receives applications for more shares than issued by the company, it is known as 'over-subscription'. Under-Subscription of Shares: The shares are said to be under subscribed if the number of shares applied is less than the number of shares offered to public for issue. In this case subscribed capital will be less than issued capital. Pro-rata Allotment of Shares: Where there is over-subscription, i.e., the company receives applications for more shares than offered to the public, it is not possible for the company to allot shares to all applicants. The company may reject some applications and make pro-rata allotment to remaining applicants. In case of pro-rata allotment each applicant receives the shares in proportion to shares applied for. For example, if shares issued are 1,000 and the shares applied are 1,500, then the proportion of share applied to allotment is 15 : 10 or 3 : 2. In case of pro-rata allotment excess application money received is transferred to share allotment and while receiving allotment money, excess application money received on application is adjusted. Calls-in-Arrears: Calls-in-Arrears is that part of called up capital, which has not yet been paid by shareholders. The company is authorized to charge interest thereon at the rate specified in its Articles. In case, its Articles are silent about it, then as per 'Table A' * a company can charge interest @ 5% p.a. However, the directors have the right to waive off the interest. Calls-in-Advance: Calls-in-advance is that amount which has not been called up by the company but has been paid by some shareholders. As per the provisions of Table A, a company should pay interest @ 6% p.a. on any calls- in-advance money received by it. The money received as calls-in-advance does not become part of share capital. It is shown under a separate heading, namely Calls-in-Advance on the liabilities side under the heading current liabilities. Minimum Subscription: Minimum subscription is the amount stated in the prospectus as the minimum amount which, in the opinion of the directors, must be raised by the issue of shares in order to ensure that the company can pay the debts incurred in connection with the formation and preliminary expenses, and the amount left will be sufficient for working capital.

A public company cannot allot shares unless the amount of minimum subscription has been subscribed and the sum payable on application for the amount so stated has been paid to and received by the company. As per guidelines of the Securities Exchange Board of India (SEBI), a company making any public issue of shares, debentures, etc., must receive a minimum of 90% subscription against the entire issue before making any allotment of shares or debentures to the public. Preliminary expenses are those which are necessarily incurred in connection with the formation of the company. Preliminary expenses inc1ude: (i) Cost of drafting and printing different documents for registration of the company. (ii) Stamp duty on necessary documents and registration fees. (iii) Stamp duty on authorized capital. (iv) Cost of drafting, printing and issuing prospectus. (v) Cost of preliminary books and common seal. (vi) Under-writing commission payable.

Difference between Equity Shares and Preference Shares.,

Basis of difference 1. Right to Dividend Equity Shares Preference Shares Dividend on equity shares is paid Dividend on preference shares is after the payment of preference paid before payment of dividend on dividend. Equity Shares. Rate of dividend is not fixed. Rate of dividend on preference It is decided by the board of direc- shares is fixed. tors. Equity shares are not redeemable during the life of "the company Equity share capital is only repayable after the preferel1ce shares have been paid. Cannot be converted. Arrears cannot accumulate. Preference shares are redeemable during the life of the company. In case the company winds up preference share capital gets the right of repayment prior to equity share capital Can be converted into equity shares. In case of cumulative preference shares, arrears can accumulate. May receive premium on redemption.

2. Rate of Dividend

3. Redeem ability . 4. Repayment of capital in case of liquidation of company I 5. Conversion 6. Dividend Arrears 7. Premium at the time of redemption 8, Voting rights, .
,

Cannot carry right to receive premium on redemption. Actually they can't be redeemed, Equity shareholders enjoy voting

Preference shareholders do not Rights have any voting rights except at their class meetings or when divi dend is not paid for three consecutive
years

Different types of Preference Shares Preference share may be of following types:

(a) Cumulative Preference Shares are those Preference Shares on which the arrears of dividend accumulate. If the profit in any one year or any series of years are insufficient to pay fixed dividend, such accumulated dividend must be paid out of the first available profit in any succeeding year. There is, however, no obligation to pay until there is sufficient profit available. (b) Non-Cumulative Preference Shares are those shares on which dividends are payable out of each year's profits, no arrears are carried forward. (c) Participating Preference Shares are those shares which are entitled to share in any surplus, after payment of their own fixed dividend and a dividend to the equity shareholders. (d) Non-Participating Shares are those shares which are entitled to a fixed rate of dividend only and do not share in the surplus profits. (e) Redeemable Preference Shares are those shares which enjoy the right to be redeemed, i.e" to be paid back on or after a certain date. (f) Irredeemable Preference Shares are those shares which are not redeemable.After the commencement of the Companies (Amendment) Act, 1988, no company limited by shares can issue any preference share which is irredeemable. (g) Convertible Preference Shares are those shares which confer on its holder a right of conversion into equity share. (11) Non-Convertible Preference Share are those shares which do not confer on its holder a right of conversion into equity share. Unless otherwise stated, a preference share is always deemed to be a non-convertible.

Difference between Authorised Capital and Issued Capital.

Authorised Capital Authorised capital is fixed after taking into account the requirements of present and future. Issued Capital Issued capital is fixed after taking into account present requirements onJy.

Basis 1. Purpose

2. Scope for raising

A company cannot raise more capi- A company cannot issue share tal than stated in the Memorandum capital more than the authorised of Association. capital. Stamp duty is payable on authorised capital. Authorised capital is the basis for registration fee. No stamp duty is payable on issued capital. duty Issued capital is not the basis for registration fees.

3. Basis of stamp 4. Basis of company registration fees

Issue shares at a discount by a company Issue of Shares at a Discount (Sec. 79): When shares are issued at a price less than the face value they are said to have been issued at a discount. Generally, a company cannot issue shares at a discount except in special cases. Section 79 of the Companies Act permits the issue of shares at discount provided the following conditions are satisfied. (i) The articles must authorize such as issue. (ii) The shares must be of a class already issued.

(iii)

At 1east one year must have elapsed since the company is entitled to commence business, (iv) The issue must be authorized by an ordinary resolution passed at the general meeting of the company and sanctioned by the Company Law Board, (v) The resolution must specify the maximum rate of discount (not exceeding 10% or such higher percentage as the Company Law Board may permit in special case) at which the shares are issued, (vi) The share must be issued within two months after the date when the issue is sanctioned by the Company Law Board or within such extended time as the Company Law Board may permit, (vii) Particulars of the discount not yet written off must appear in every balance sheet of the company, Issue of Shares at a Premium by a Company Issue of Shares at a Premium (Sec. 78): Share are said to be issued at premium when they are issued at a price higher than the face value, The amount in excess of face value is called 'Securities Premium', e,g,...if a share of Rs, 100 is issued at Rs, 120, it is said that the share has been issued at a premium of Rs, 20, The premium on issue of shares is a capital receipt and must be credited to a separate account called, 'Securities Premium Account', Important After the 'commencement of tile Companies (Amendment) Act, 1999, the term 'Securities Premium' is to be used in place of 'Share Premium', Therefore, the term Securities Premium Account has been used, Purpose: According to Sec, 78 of the Companies Act 1956, the securities premium can be applied for the following purposes: (i) To issue fully paid bonus shares to the members, (ii) To write off preliminary expenses, discount or commission or expenses on issue of shares or debentures of the company, (iii) To provide for the premium payable on the redemption of redeemable /preference shares or debentures of the company,

Illustration:

Buy-back of shares The shares repurchase or buy-back of shares is a situation when a company uses its accumulated profits (represented by sufficient liquid assets) to cancel or retire a part of its outstanding shares by purchasing from the market or directly from the shareholders. The cancellation of shares means that the present shareholders will receive cash for their shares. The general rationale for the repurchase is that as long as the earnings remains constant, the repurchase of shares reduces the number of shares outstanding and thus, raisin~ the earning per share and the market price of the share. Whenever a company wants to repurchase its shares, It must disclose it to the shareholders. The company may have different methods of shares repurchase. There are three widely used approaches to shares repurchase as follows: (i) Repurchase Tender Offer: In a repurchase tender offer, a firm specifies a price at which it I will buy-back the shares, the number of shares it intends to repurchase and the period of time for which its will keep the offer open and invites the shareholders to submit their shares for the repurchase. The firm may also retain the flexibility to withdraw the offer if insufficient number of shares are submitted for repurchase. (ii) Open Market Repurchase: In the case of open market repurchase, the firm buys the shares in the market at the prevailing market price. The open market repurchase can be spread out over longer time periods than tender offers. In terms of flexibility, the open market repurchase provides the firm more freedom in deciding when to repurchase and how many shares to be repurchased. (iii) Negotiated Repurchase: In this case, the firm may buy shares from a large shareholder at a negotiated price. This form of repurchase can be adopted only when a large shareholder, generally one of the promoter groups, is willing to sell the shares. Although, the reduction in number of share might increase earning per share, the effect is usually a consequence, of higher leverage and not of share buy back. Furthermore, the increase in leverage should increase the risk ness of the share and lower the price earnings ratio. Whether this will increase or decrease the price of the share will depend upon whether the firm is moving to its optimal position by repurchasing, in which case the price will increase, or moving away from it, in which case the price will fall. There are several advantages of using' share repurchase as an alternative to Payment of cash dividend to the shareholders. These may be enumerated as follows: I. The cash dividend implies a commitment to continue payment in future periods, whereas shares repurchase is a one time return of cash. Consequently, firms having excess cash flows, which are uncertain about their ability to continue generating these cash flows in future periods, should repurchase the shares instead or paying cash dividend. 2. The decision to repurchase shares affords the firm with more flexibility to reverse the decision and/or to spread the repurchase over a longer period than the decision to pay a dividend 3. Shares repurchase are more focused in terms of paying out cash only to those shareholders who need it. This benefit flows from the voluntary nature of share buy-back; only those who need the cash can tender their shares for buy-back, whereas those who do not want the cash can continue to hold. 4. Shares repurchase may provide a way of increasing insiders control in the firm as it reduces the number of shares with the outsiders. If the insiders do not tender

their shares for buy-back, they will end up holding a larger proportion of the firm and thus having greater control.

Thus, the shares repurchase allows firms to return cash to the shareholders and still maintaining flexibility in terms of future periods. In general, however, the net benefit of shares repurchase, relative to dividend, will depend upon the following considerations: a) Stability of cash flow. If the excess cash flows are temporary or unstable, the firms should repurchase the shares; if the cash flows are stable, then the firm may prefer dividends b) Predictability of future investment need's. ..Firms that are uncertain about the magnitude of future investment opportunities are more likely to use share repurchases a means of returning cash to the shareholders. c) Undervaluation of the share.. The shares repurchase is more relevant when the share arc found to be undervalued. In such a case, the firm can accomplish two objectives. First, if the shares remain undervalued, the remaining shareholders will benefit if the firm bur-back the shares at a price less than the true value and second, the shares repurchase may send a signal to the capital market that the share is undervalued and then the market will react accordingly pushing up the price of the share. Provisions/restrictions concerning buy-back of shares The Companies (Amendment) Ordinance (October 31, 1998 and January 7,1999) allows companies to buy-back their own shares subject to regulations laid down by SEBI. The new Sections (77 A and 77B) in the Ordinance lay down the provisions/restrictions concerning buy-back of shares. * A company can finance its buy-back out of (i) its free reserves or (ii) the securities premium account or (iii) Proceeds of an earlier issue other than fresh issue of shares made specifically for buy-back purposes. A company is allowed buy-back subject to the following conditions:(a) the buy-back is authorized by its articles; (b) a special resolution has been passed in general meeting of the company authorizing buy-back; (c) the buy-back does not exceed 25 per cent of the total paid up capital and free reserves of the company. : (d) debt-equity (including free reserve) ratio does not exceed to 2 :1 after the proposed buy-back; (e) all shares or other specified securities are fully paid up; and (f) the buy-back is in accordance with SEBI regulations framed for this purpose. * The notice for the meeting convened to pass special resolution on buy-back must be accompanied by an explanatory statement giving a full and complete disclosure of all material facts, the necessity for buy-back, class of securities to be purchased and the amount to be invested under the buy-back, and the time limit for completion of buy-back. maximum time of one year from the date of passing of resolution has been stipulated to complete the buy-back. * A company is required to destroy the shares brought back within seven days of completion of the buy-back. Further, it is prohibited from issuing fresh equities within two years of buy-back, except by way of bonus issue or discharge of its existing obligation of converting warrants, preference shares, debentures, stock option schemes, etc. into equity shares.

* A company which has defaulted on repayment of deposits, term loan, redemption of debenture/preference share, etc. is not allowed to buy-back shares. Buy-back of shares through subsidiary companies or investment companies is also prohibited. * The Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 1988 provide for the following: (a) Regulations cover only the listed securities of company. . (b) Buy-back is permitted through the tender offer mode from existing share holder on proportionate basis and from odd-lot holders. Buy-back through the book-building mode and purchases through stock exchange are allowed for open market transactions. (c) In the purchases made through the stock exchange, the details of purchases under the buy-back scheme shall be made available to the stock exchange, the details, in turn, shall be made available to public regularly. (d)Extensive disclosures need to be made in the Explanatory Statement to be annexed for the notice for general meeting and the Letter of Offer. e) Pre and post buy-back holdings of promoters need to be disclosed carefully. (t) Buyback through negotiated deals, spot transactions or private transaction- is not permitted. (g) To ensure strict compliance with the provisions of SEDI Regulations, merchant banker has been made to be associated in every offer for buy-back, wherein he has to give a "due diligence" certificate. (h) To ensure timely completion of buy-back process, the Regulation provide for time-bound steps in every mode. Thus, except in cases of purchases through stock exchange, an offer for buy back shall not remain open for more than 30 days. (i) To ensure security/safety, the company making the buy back offer has to open an escrow account on the same lines as provided in the Takeover Regulations. Advantages of Buy back Several arguments have been advanced for permitting buy-back of shares. Some of the principal reasons for allowing a company to purchase its own shares are given below: To return surplus cash to the investors: ,Many companies want to have the facility of buy-back as it allows them to manage their surplus cash The surplus cash could also be distributed to the shareholders through' paying dividends. The share repurchases and dividends are close substitutes in many respects, the most obvious common element of both being distribution of cash to shareholders. The way the corporate entities tend to view the two are, however, different. While the dividends are most likely to be increased if the future earnings of companies are high enough to maintain the higher dividend payments, the share buy-backs are announced more sporadically. The share repurchases are not expected to be repeated on a regular basis. In addition, the share buy-backs have a clear tax advantage for the company over cash dividends. If companies distribute cash as dividends, they have to pay a dividend tax, while the investors escape a tax liability. On the other hand, if cash is distributed through buy-back, while the companies do not pay a tax, the individual investor has to pay capital gains tax. Thus, the companies prefer buy- back in order to minimize their tax outgo. To increase underlying share value: The process of buying-back and extinguishing the shares by a company brings about a decrease in equity (i.e. the number of shares in issue) and consequently leads to an increase in the earning per share (EPS) of the company. It is presumed that the market price of the script" rise proportionately to maintain the price to earning (P/E) ratio at. the prebuy -back' level. The buy-backs are particularly relevant for companies which are flush with free reserves and liquid assets and whose share prices do not reflect their intrinsic worth. It is also commonly assumed that managers have better information about the value of the firm than other market participants. A share buy-back, therefore, I appears to be a credible mechanism for 'signaling' this

information. A share buy- back may also be announced to support share price during periods of temporary weakness. To achieve or maintain a target capital structure: The buy-backs provide flexibility to corporate entities to alter their capital structure and financial position, keeping in view the needs of the business. Many companies feel that they should have full control to restructure their balance sheets. Without the flexibility of buy-backs, a company can be saddled with an obsolete capital structure. Buy- backs aid a company in achieving an optimum debt equity ratio especially when its equity is proportionately large. To prevent hostile takeover bids: The first and foremost impact of the buyback of shares by a company is that of eliminating surplus cash, which makes companies less susceptible to hostile takeovers. The buy-back will lead to a decline in liquidity and increase in share prices, which will make a takeover operation difficult.

Company Accounts-Issue of Debentures A debenture is a written acknowledgement of a debt by the company under its seal. It contains a contract for the repayment of the principal debt on a specified date and for payment of interest at a fixed rate per cent until the principal sum is repaid. It is usual to prefix 'debentures' with the rate of interest. Thus, if the rate of interest is 9% the name given will be '9% Debentures'. . Nature of Interest: Interest on Debentures is a charge against profits of the company and is payable irrespective of the fact whether there are profits or not. Interest is payable on the nominal value and not on issue price of a debenture. No interest is payable on debentures issued as collateral security. Classification of Debentures 1. From Security point of view : (a) Mortgage Debentures, (b) Simple or Naked Debentures 2. From Redemption point of view : (a) Redeemable Debentures, (b) Irredeemable Debentures 3. From Record point of view : (a) Registered Debentures, (b) Bearer Debentures 4. From Priority point of view: (a) First Debentures, (b) Second Debentures 5. From Convertible point of view: (a) Convertible Debentures, (b) NonConvertible Debentures Issue of Debentures Issue of Debentures for Cash
Debentures may be issued at par, at premium or at a discount as in the case of shares. The accounting entries remain same as in the issue of shares. The only difference is in the name of the accounts, i.e., instead of the word 'Share' the word 'Debenture' is used.
Basis of Distinction 1. Capital or of debt.

Distinction between Share and Debenture ,

Share Share is a part of capital.

Debenture Loan

Debenture is an acknowledgement

2. Holder . 3. Ownership . 4. Dividend/ Interest

The holders of shares are called shareholders Shareholders are the owners of the company Dividend is payable on shares only out of profits.

The holders of debentures are called debenture holders. Debenture holders are the credi. tors of the company. Interest is paid on debentures Whether profit has been earned or not. The rate of interest is fixed. Dividend/

5. Rate of In the case of equity shares. rate of dividends fluctuates according Interest to profitability of the company. 6.Repayment Shares are not repayable unless the company winds up. There are legal restrictions on the issue of shares at discount. Equity shares can never be convertible. Shareholders generally enjoy voting rights.

Debentures are repayable alter a fixed period. Debentures may be issued at a discount without any restriction. Debenture can be convertible.

7. Issue at discount 8.Convertibility

9. Voting rights

Debenture holders do not have any voting rights (except at their class meetings).

Final Accounts of Company

Final Accounts of a Company : the final accounts of a company consist of (a) a Balance Sheet disclosing the financial position as at the end of the financial year, and (b) Profit and Loss Account disclosing the results of the operations for the period which is usually the financial year. Balance Sheet of a Limited Company The prescribed form of the Balance Sheet of the company is given in Part I of Schedule VI of the Companies Act. The Companies Act has laid down two forms of Balance Sheet, viz., (a) Horizontal form and (b) Vertical form. (a) ASSETS SIDE of a Balance Sheet has been grouped into the following five broad heads in the order as given below: (i) Fixed Assets: Goodwill, Land, Building, Plant & Machinery, Furniture & Fixture, Patent& Trade Mark, Live Stock, Vehicle, etc. (ii) Investments : in Govt. Securities, in shares, debentures & bonds of other Cos. (iii) Current Assets, Loans and Advances(a) Current Assets : Intt. Accrued on investments, Stores & Spare Parts, Loose Tools, Stock, WIP, Debtors, Bank, Cash etc. (b) Loans and Advances : Loans and Advances to subsidiaries, Bills Receivable, Balance with Customs, Port Trust etc. (iv) Miscellaneous Expenditure (To the extent not written off) : Preliminary Expenses, Expenses on Issues, Discount on issue of shares, Intt. Paid out of capital, Development Expenditure not adjusted etc. (v) Profit and Loss Account (Dr.) LIABILITIES SIDE of a Balance Sheet is grouped broadly in the following order: (i) Share Capital : Authorised Capital, Issued Capital, Subscribed Capital (ii) Reserves and Surplus : Capital Reserve, Capital Redemption Reserve, Securities Premium Account, Profit & Loss Account, Sinking Funds. (iii) Secured Loans : Debentures, Loans & Advances from Bank and subsidiary, Other Loans & Advances, Intt. Accrued and due on secured loans (iv)Unsecured Loans : Fixed Deposits, Loans & Advances from subsidiary, Other unsecured loans. (v) Current Liabilities and Provisions(a) Current Liabilities : Bills Payable, Creditors, Unclaimed Dividend, Other current liabilities (b) Provisions : Provision for taxation, Proposed Dividend, Prov. for contingencies, Provident Fund, Other Prov. Contingent Liability: A possible future liability which depends on the happening of an uncertain event is called contingent liability. Contingent liabilities are not included in the total of liabilities-side. Rather, contingent liabilities are shown as a footnote to the Balance Sheet. Following are the examples of contingent liabilities: (a) Claims against the company not acknowledged as debts. (b Liability for amount uncalled on partly paid shares, (c) Arrears of fixed cumulative dividends, , (d) Liability for Bills discounted but not yet matured. or disputed liability or claims.

Difference between Balance Sheets of a Company and a Partnership/ Sole Proprietorship Firm: Basis of Company's Balance Sheet Partnership/ Sole Proprietorship Firm's Distinction Balance Sheet 1. Form Company's Balance Sheet has There is no form prescribed in the ' to be prepared according to Partnership Act/other statues. Schedule VI prescribed under . the Companies Act 1956 2. Figures for two years Figures of both, previous year and current year, have to be shown in the Balance Sheet. Assets and Liabilities have to be shown under major heading. Company's Balance Sheet has to be audited and signed by a Chartered Accountant. A Company's Balance Sheet is prepared in the order of permanence Figures of only current year are shown.

3. Major Heading

There is no such restriction.

4. Audit ,

Audit of firm's balance sheet is not necessary.

5. Order ,

A Partnership Firm's Balance Sheet is usually prepared in order e.

Statutory contents of Liabilities Side of Company Balance Sheet

There are two types of items shown on liabilities side. First, those items which are related to owners' equity. It mainly includes share capital, reserves and surplus. Second, those items which create the claims of creditors in the company. Examples of such items are secured loans, unsecured loans, current liabilities, and provisions, etc. In this context, it seems necessary to explain the allowing items for our better understanding of the contents: ' (i) Share Capital. Share capital means the share of the owners in the company. Under the heading share capital, the following details are shown: (1) (i) Authorized Share Capital. This refers to the total amount of share capital a company is authorized to raise according to the Memorandum of .association. It may include both Preference Share Capital and Equity Share Capital or only Equity Share Capital. The total amount of Authorized Share Capital is shown by way of information in the Balance Sheet. It is not added to abilities of the company. (ii) Issued Share Capital. Issued share capital is that part of the Authorized Share Capital which has been issued for subscription till the date of Balance Sheet. It includes a number of classes (equity or preference) of shares and their face value etc. (iii) Subscribed Share Capital. It refers to that part of issued capital which has been actually subscribed by the applicants along with share value called up. (iv) Paid-up Share Capital. It refers to that part of subscribed share capital, which has been paid-up by the subscriber to share capital. (2) Information regarding shares allotted for consideration other than cash and shares allotted as fully paid up by way of bonus shares must also be given in notes under subscribed capital. The source from which bonus shares are issued also need to be stated. (3) If any company have issued different types of preference shares, details of each types of shares should be given. Terms of redemption or conversion or date of earliest conversion in case of redeemable preference shares should be clearly mentioned in the offer for prospectus. (4) Amount of calls in arrears should be shown as deduction from called-up capital or 'Subscribed Capital" to ascertain the paid-up capital of the company: which is actually shown as liability in the Balance Sheet.

(5) Amount standing to the credit of shares forfeited should be shown as addition to paid-up capital. But in case of profit on re-issue of forfeited shares, it should be transferred to capital reserve account only. (ii) Reserves and Surplus. According to the Companies Act, 1956, 'Reserves and;' Surplus' include the following items: , (i) Capital Reserve, e.g., profits prior to incorporation, profit on acquisition of business, profit on sale of fixed assets, profit remaining on re-issue of forfeited shares, profit on redemption of debentures, (ii) Capital Redemption Reserve Account. (iii) Share Premium Account . (iv) Other reserves. Nature and amount of each reserve should be explained separately. It includes general reserve, generalization reserve and special reserve for depreciation. If there is debit balance in profit and loss account, it should be deducted from the General Reserve. (v) Surplus. The balance of net profit in the Profit and Loss Account is to be shown against this item. (vi) Proposed Additions to Reserves. (vii) Sinking Fund. (Reserves should be shown as divided into capital reserve and revenue. reserves. Reserves which are specifically created and represented by earmarked investments in outside securities are known as 'Sinking Fund'. These funds are generally created and accumulated either for replacement of fixed assets or: redemption of liabilities.) (iii) Secured Loans. If any company gives security for the loan by a mortgage or charge on all or any of its property, this loan will be called as 'Secured Loan'. In the Balance Sheet of the company, these are shown in the following order: .: (1) Debentures. The following Information is necessary in relation to debentures: (i) Terms of redemption or conversion of debentures and its earliest date. (ii) Details of debentures which are redeemed by the company and the company had the right to issue them. (iii) If the company gives security for any loan, by a mortgage or charge on debentures details of the same which should be given along with related loan. (iv) Redeemed debentures which are not paid off up to the date of Balance Sheet, should be shown under 'current liabilities' only. (2) Loans and advances from banks. (3) Loans and advances from subsidiaries. (4) Other loans and advances, if any. Information regarding nature of security given for each secured loan should be given along with the respective loans. Interest accrued and due on secured loans should be shown along with the appropriate items. But interest accrued but not due will be shown under current liabilities. Loans from directors or managers, if any, are to be shown separately. (iv) Unsecured Loans. If the company borrows loans without giving any security, these loans are called unsecured loans',. The loans which are unsecured generally include the following: (i) Fixed deposits (ii) Loans and advances from subsidiaries (iii) Short-term loans and advances from banks (iv) Short-term loans and advances from others (v) Other loans and advances from banks (vi)Other loans and advances from others. Short-term loans are those loans which are due for repayment within a period of one year from the date of the Balance Sheet. Like secured loans, interest accrued and due on unsecured loans is to be included under the appropriate sub-headings. (v) Current Liabilities and Provisions. This heading can be divided into two parts: (A) Current Liabilities. These are those liabilities which are repayable in the near future (generally within one year). (B) Provisions. According to Part III of Schedule II of the Companies Act, 'Provision' word means any amount written or retained by way of providing for depreciation, renewal or

diminution in value of assets or retained by providing for any known liability of which the amount cannot be determined with substantial accuracy. If any provision is more than liability ,then excess will be treated as a reserve. The heading 'Current Liabilities and Provisions' shown in the Balance Sheet includes the following items in that order: (A) Current Liabilities (1) Acceptances (or Bills Payable) (2) Sundry creditors (3) Subsidiary companies balances (4) Advance payment and unexpired discounts (5) Unclaimed dividends (6) Other liabilities, if any (7) Interest accrued but not due on loans.

(B) Provisions-These may include the following: (8) Provision for taxation : (9) Proposed dividends (10) Provision for contingencies (11) Provision for provident fund (12) Provision for insurance, pension and similar staff benefit schemes (13) Other provisions Statutory Contents of Assets Side of Company Balance Sheet The various assets shown under different headings in the Balance Sheet of a company include: 9.8.6(i) Fixed Assets. Fixed assets are those assets which are used for long time in, business to earn profit. Relevant information regarding these assets are as follows: 1. As far as possible, different assets should be shown separately. 2. Regarding every fixed asset, it is necessary to show its original cost and the additions thereto and deductions there from during the year and the total depreciation written off or provided up to the end of the year on it. Mode of valuation (cost or book value) of every asset should also be explained in the books of account. Amount of depreciation written off or provided for the year should be allocated to each asset separately. Only the amount of proposed depreciation up to the date of Balance Sheet for each asset will be shown. According to the Companies Act, it is not necessary to show amount of current year's depreciation and amount of last year's depreciation separately, although, in practice, generally we show it separately. (ii) Investments. In the Balance Sheet of a company, investments are shown after fixed assets. Investments in nature are fixed. Regarding investments, the Companies Act has laid down specific provisions like: 1. All the investments are shown by dividing into the following four divisions: (A) Investment in Government and trust securities; (B) Investment in shares, debentures and bonds of various companies; (C) Investment in shares, debentures and bonds of subsidiary companies, and (D) Investment in fixed assets. 2. It is necessary to disclose nature and mode of valuation of every investment. Nature of investment means, to disclose if it is a Long-term investment or a current asset. As regards the mode of valuation, it is necessary to disclose how the investments are valued, i.e., on cost price or market price. 3. Total amount of company's quoted and unquoted investments and market value of quoted investments must be clearly disclosed in Balance-Sheet. (iii) Current Assets, Loans and Advances .. These are the assets which are likely to be converted into cash within a year from the date of Balance Sheet. These can broadly be divided into two categories: (A) Current assets, and (B) Loans and advances. (A) Current Assets. The various current assets shown in the Balance Sheet include: 1. Accrued interest on investments, 2. Stores and spare parts, 3. Loose tools, 4. Stock-in-trade, 5. Work-in-progress, , 6. Sundry debtors (i) Debtors more than 6 months old (ii) Other debtors Less: Provision for doubtful debts, and: 7. Cash and Bank balance. ., (B) Loans and Advances. It includes cash loan given to different persons, advances against purchase of goods and various expenses by the company, etc.

In the Balance Sheet of the company, these items are shown under separate sub-headings as follows: 1. Loan and advances to subsidiary company, 2. Bills of exchange, 3. Advances recoverable in cash or in kind or for value to be received, i.e., preliminary expenses, etc. 4. Balance with customers, Port Trust, etc. where payable on demand. (iv) Miscellaneous Expenses. This refers to that part of expenses which are not written off up to the date of Balance Sheet. These are shown in Balance Sheet under 'Miscellaneous Expenditure'. This includes: 1. Preliminary expenses. 2. Expenses including commission or brokerage on underwriting or subscription of shares or debentures. 3. Discount allowed on issue of shares or debentures. 4. Interest paid out of capital during construction period of the company. 5. Development expenditure not adjusted. 6. Other sums, specifying nature. (v) Profit and Loss Account : If there is any debit balance in Profit and Loss Account, it will be shown on the assets side of Balance Sheet.