Company accounts are prepared to show the performance and financial position of a company for a period. A company raises funds mainly through share capital and borrowings. Understanding share capital (equity and preference), simple issue of shares, and presentation of basic financial statements is essential at an introductory level.
A company is an artificial person created by law. It has a separate legal identity distinct from its shareholders. Its major features include:
Share capital is the amount contributed by shareholders to the company in exchange for shares.
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Company accounts are prepared to show the performance and financial position of a company for a period. A company raises funds mainly through share capital and borrowings. Understanding share capital (equity and preference), simple issue of shares, and presentation of basic financial statements is essential at an introductory level.
A company is an artificial person created by law. It has a separate legal identity distinct from its shareholders. Its major features include:
Share capital is the amount contributed by shareholders to the company in exchange for shares.
Equity shareholders are the real owners of the company. They:
Preference shareholders have preferential rights:
Common types: cumulative/non-cumulative, participating/non-participating, redeemable/irredeemable (as per syllabus level).
At an introductory level, issue of shares is recorded by recognizing:
Company issues 10,000 equity shares of ₹10 each, fully paid in cash.
Bank A/c Dr. ₹1,00,000
To Equity Share Capital A/c ₹1,00,000
If shares are issued at premium (basic idea):
Bank A/c Dr.
To Share Capital A/c
To Securities Premium A/c
Company profits after tax may be retained as reserves. Reserves strengthen financial position and may be used for specific purposes.
Examples:
At a basic level, company final accounts include:
Key idea: In a company, owner’s capital is represented mainly by share capital and reserves & surplus, instead of a single “capital” account as in sole proprietorship.
From this topic
Important features of a company are: (i) separate legal entity—company is distinct from its shareholders; (ii) limited liability—members’ liability is limited to unpaid amount on shares; (iii) perpetual succession—company continues irrespective of changes in membership; and (iv) transferability of shares (in a public company), which allows ownership to change without affecting existence of the company.
Equity shares carry voting rights and dividend is not fixed; equity shareholders get dividend after preference dividend and bear higher risk with potential higher return. Preference shares generally carry a fixed rate of dividend and have preferential right to dividend and repayment of capital, but usually have limited voting rights. Thus, equity is residual ownership, while preference is preferential but less risky.
Share capital is the amount raised by a company by issuing shares. It is shown under shareholders’ funds in the balance sheet and represents ownership financing. Share capital is commonly classified as: (1) Authorised capital—the maximum capital permitted by memorandum; (2) Issued capital—the part of authorised capital offered to the public; (3) Subscribed capital—the part taken up by shareholders; (4) Called-up capital—the amount demanded by the company from shareholders; and (5) Paid-up capital—the amount actually received. This classification explains the flow from legal permission to funds actually collected.