UNIT 1-

MEANING AND DEFINATION OF A COMPANY

Company is an artificial person being created by the law that has an existence separate and apart
from its owners. In other words a company is an artificial person created by law, with a distinctive
name, a common seal and perpetual succession. It can sue and be sued in its own name.

In words of L.H HANEY, “A company is an artificial person created by law having a separate entity
with a perpetual succession and a common seal. It is a voluntary association of individuals for
profits, having a capital divided into transferable shares, ownership of which is the condition of
membership”

ESSENTIAL FEATURES OF A COMPANY

Following are the essential features (characteristics) of a company:

1. Association of persons: a company is an association of persons, usually for profit.

2. Artificial person: It is an artificial person created by law. A company is an artificial person,
which exists only in the eyes of law.
3. Separate legal entity: company has a separate legal entity. It has a right to sue and can be
sued, can have its own property & its own bank account.
4. Limited liability: The liability of every member is limited to the face value of shares, held by
him.
5. Perpetual succession:A company has a continuous existence. Its existence does not get
affected by admission, retirement, death or insolvency of its members. The members may
come or go but the company may go forever. Only law can terminate its existence.
6. Common seal:As a company is an artificial person, so it can sign any type of contracts. For
this purpose, it requires a common seal which acts as the official signatories of the company.
All the contracts prepared by its directors must bear seal of the company
7. Transferability of shares:A company has to mention its maximum capital requirements in
future in its memorandum of association. Its capital is divided into shares, which are easily
transferable from person to person.
8. Separation of ownership &management :The ownership is divorced from management
because a joint stock company is‘ managed by a Board of Directors elected by the
shareholders (i.e. owners).
 CLASSIFICATION / TYPES OF COMPANIES

Companies on the Basis of Liabilities

When we look at the liabilities of members, companies can be limited by shares, limited by
guarantee or simply unlimited.

a) Companies Limited by Shares

Sometimes, shareholders of some companies might not pay the entire value of their shares in one
go. In these companies, the liability of member’s is limited to the extent of the amount not paid by
them on their shares. This means that in case of winding up, members will be liable only until they
pay the remaining amount of their shares.

b) Companies Limited by Guarantee

In some companies, the memorandum of association mentions amounts of money that some
members guarantee to pay. In case of winding up, they will be liable only to pay only the amount so
guaranteed. The company or its creditors cannot compel them to pay any more money.

c) Unlimited Companies

Unlimited companies have no limits on their member’s liabilities. Hence, the company can use
all personal assets of shareholders to meet its debtswhile winding up. Their liabilities will extend to
the company’s entire debt.

Companies on the basis of members

a) One Person Companies (OPC)

These kinds of companies have only one member as their sole shareholder. They are separate from
sole proprietorships because OPCs are legal entities distinct from their sole members. Unlike other
companies, OPCs don’t need to have any minimum share capital.

b) Private Companies

Private companies are those whose articles of association restrict free transferability of shares. In
terms of members, private companies need to have a minimum of 2 and a maximum of 200. These
members include present and former employees who also hold shares.
c) Public Companies

In contrast to private companies, public companies allow their members to freely transfer their
shares to others. Secondly, they need to have a minimum of 7 members, but the maximum number
of members they can have is unlimited.

Companies on the basis of Control or Holding

In terms of control, there are two types of companies.

a) Holding and Subsidiary Companies

In some cases, a company’s shares might be held fully or partly by another company. Here, the
company owning these shares becomes the holding or parent company. Likewise, the company
whose shares the parent company owns becomes its subsidiary company.

Holding companies exercise control over their subsidiaries by dictating the compositionof their
board of directors. Furthermore, parent companies also exercise control by owning more than 50%
of their subsidiary companies’ shares.

b) Associate Companies

Associate companies are those in which other companies have significant influence. This “significant
influence” amounts to ownership of at least 20% shares of the associate company.

The other company’s control can exist in terms of the associate company’s business decisions under
an agreement. Associate companies can also exist under joint venture agreements.

Object of Prospectus:
The objects of the prospectus are as follows:
1. To bring to the notice of the public that a new company has been formed.
2. To preserve an authentic record of the terms and allotment on which the public have
been invited to buy its shares or debentures.
3. To secure that the directors of the company accept responsibility of the statement in
the prospectus.
Contents of Prospectus:
The contents of the prospectus have been specified in schedule II.
The important contents to be included in the prospectus are as follows:
1. The name and address of the company.
2. The object of the company.
3. Full particulars of the signatories to the memorandum and number of shares taken by
them.
4. The number and classes of shares.
5. The names, addresses and occupations of the directors, managing directors or
managers etc.
6. The qualification shares of a director and the remuneration of the directors.
7. The minimum subscription.
 8. The time of the opening of subscription lists.
9. The amount payable on application and allotment and calls.
10. The nature and extent of interest of every promoter in the promotion of the
company.
11. The names of underwriters and the opinion of the directors regarding discharge of
their obligations.
12. The estimated amount of preliminary expenses.
13. The names and addresses of the auditors of the company.
14. Particulars of premium paid or payable on shares issued within two years preceding
the issue of the prospectus.
15. Particulars of shares or debentures issued within two years, preceding the date of
issue of prospectus, as fully or partly paid up or otherwise than in cash.
16. The interest of the promoters of directors in promotion of the company or in any
property acquired by the company.
17. Particulars of contracts which give any preferential right to any person subscribe the
shares or debentures of the company.
18. Particulars about reserves and surpluses.
19. Voting rights of the different classes of shares.
20. If any profit has been capitalised then the particulars of capitalised profit.
21. Particulars of the length during which the business has been carried on by the
company.
22. Reports of the auditors regarding profits and losses of the company.
23. A similar report by the chartered accountants regarding the profits and losses and
assets and liabilities of the company.

Types of shares
Broadly, there are two – equity shares and preference shares

Equity shares: Equity shares are also referred to as ordinary shares. They are one of the most
common kinds of shares. These stocks are documents that give investors ownership rights of the
company. Equity shareholders bear the highest risk. Owners of these shares have the right to vote
on various company matters. Equity shares are also transferable and the dividend paid is a
proportion of profit. One thing to note, equity shareholders are not entitled to a fixed dividend. The
liability of an equity shareholder is limited to the amount of their investment. However, there are no
preferential rights in holding.

Equity shares are classified as per the type of share capital.

Authorised share capital: This is the maximum amount of capital a company can issue. It can be
increased from time to time. For this, a company needs to conform to some formalities and also pay
required fees to legal entities.
Issued share capital: This is the portion of authorised capital which a company offers to its investors.

Subscribed share capital: This refers to the portion of issued capital upon which investors accept
and agree.

Paid-up capital: This refers to the portion of the subscribed capital for which the investors pay. Since
most companies accept the entire subscription amount at one go, issued, subscribed, and paid
capital are the same thing. • Paid up Capital: It is that portion of the called up capital which has
been actually received from the shareholders. When the shareholders have paid all the call
amount, the called up capital is the same to the paid up capital. If any of the shareholders has not
paid amount on calls, such an amount may be called as ‘calls in arrears’. Therefore, paid up capital
is equal to the called-up capital minus call in arrears.

Called up Capital: It is that part of the subscribed capital which has been called up on the shares. The
company may decide to call the entire amount or part of the face value of the shares. For example, if
the face value (also called nominal value) of a share allotted is Rs. 10 and the company has called up
only Rs. 7 per share, in that scenario, the called up capital is Rs. 7 per share. The remaining Rs. 3 may
be collected from its shareholders as and when needed.

Uncalled Capital: That portion of the subscribed capital which has not yet been called up. As stated
earlier, the company may collect this amount any time when it needs further funds.Accounting for S
Reserve Capital: A company may reserve a portion of its uncalled capital to be called only in the
event of winding up of the company. Such uncalled amount is called ‘Reserve Capital’ of the
company. It is available only for the creditors on winding up of the company.

There are a few other types of shares.

Right share: These are the kind of shares a company issues to its existing investors. Such stocks are
issued to protect the ownership rights of existing shareholders.

Bonus share: Sometimes, companies may issue shares to their shareholders as a dividend. Such
stocks are called bonus shares.

Sweat equity share: When employees or directors perform their role exceptionally well, sweat
equity shares are issued to reward them.

Preference shares: In our discussion on what are types of shares, we will now we will look at
preference shares. When a company is liquidated, the shareholders who hold preference shares are
paid off first. They also have the right to receive profits of the company before the ordinary
shareholders.

Cumulative and non-cumulative preference shares: In the case of cumulative preference share,
when the company does not declare dividends for a particular year, it is carried forward and
accumulated. When the company makes profits in the future, these accumulated dividends are paid
first. In case of non-cumulative preference shares, dividends do not get accumulated, which means
when there are no future profits, no dividends are paid.

Participating and non-participating preference shares: Participating shareholders have the right to
participate in remaining profits after the dividend has been paid out to equity shareholders. So in
years where the company has made more profits, these shareholders are entitled to get dividends
over and above the fixed dividend. Holders of non-participating preference shares, do not have a
right to participate in the profits after the equity shareholders have been paid. So in case a company
makes any surplus profit, they will not get any additional dividends. They will only receive their fixed
share of dividends every year.

Convertible and non- convertible preference shares: Here, the shareholders have an option or right
to convert these shares into ordinary equity shares. For this, specific terms and conditions need to
be met. Non-convertible preference shares do not have a right to be converted into equity shares.

Redeemable and Irredeemable preference shares: Redeemable preference shares can be claimed
or repurchased by the issuing company. This can happen at a predetermined price and at a
predetermined time. These do not have a maturity date which means these types of shares are
perpetual. So companies are not bound to pay any amount after a fixed period.

Difference between equity share capital & preference share capital

Difference between Equity and Preference Shares

Following are the key differences between equity shares and preference shares.

Basis of Difference Equity Shares Preference Shares

Definition Equity shares represent the Preference shareholders have a preferential right or
ownership of a company. claim over the company’s profits and assets.

Return Capital appreciation Regular dividend income

Dividend Pay-out Equity shareholders receive Preference shareholders have the priority to receive
dividends only after the dividends.
preference shareholders receive
their dividends.

Dividend Rate Varies based on the earnings. The rate is fixed.

Bonus Shares Equity shareholders are eligible to Preference shareholders do not receive any bonus
receive bonus shares against their shares against their holdings.
existing holdings.

Capital Repayment Equity shareholders are paid last. Preference shareholders are paid before the equity
shareholder when the company is winding up.

Voting Rights Equity shareholders enjoy voting Preference shareholders do not enjoy voting rights.
rights.

Participation in Equity shareholders have voting Preference shareholders do not participate in

Management rights, and as a result, they management operations.
Decisions participate in the management
 decisions.

Redemption Equity shares cannot be Preference shares can be redeemed.

redeemed.

Convertibility Equity shares cannot be Preference shares can be converted to equity shares.
converted.

Arrears of Dividend Equity shareholders do not Certain types of preference shareholders are eligible for
receive arrears of dividends. arrears of dividends.

Capitalization High chance Low chance

Types Ordinary shares, Bonus shares, Convertible, Non-Convertible, Redeemable,

Rights shares, Sweat equity, and Irredeemable, Participating, Non-Participating,
Employee stock options. Cumulative, Non-Cumulative, Preference Share with a
Callable Option, and Adjustable Preference Shares

Financing Source of long term financing. Source of medium to long term financing.

Mandate Companies have to issue equity All companies don’t have to issue preference share
share capital capital.

Investment Lower investment option. High investment option.

Suitability High risk-takers Low risk or risk-averse investors

Company’s The company has no obligation to The company is obligated to pay dividends to preferred
Obligation pay dividends to equity shareholders.
shareholders.

Liquidity Highly liquid, traded on the stock Not liquid, but the company can buy back the shares.
market.

Bankruptcy Equity shareholders are paid only Preference shareholders have a preferential claim over
after fully paying the preference the assets. Therefore, they are paid before equity
shareholders. shareholders.

Liquidation Equity shareholders are paid only Preference shareholders are paid after paying the
after making payments to creditors and before the equity shareholders.
creditors and preference
shareholders.
 Difference between reserve capital and capital reserve
BASIS FOR
COMPARIS CAPITAL RESERVE RESERVE CAPITAL
ON

Meaning The profit earned by the The part of uncalled

company through special capital, that is called up
transaction, that is not available only on the event of
for distributing dividend to company's liquidation is
shareholders is known as known as Reserve
Capital Reserve. Capital.

Created Capital profits Authorized capital

out of

Disclosure On the equity & liabilities side Not disclosed at all

of the balance sheet under the
head Reserve and Surplus.

Need of Mandatory Voluntary

creation

Specific No such conditions Special Resolution

condition should be passed at AGM

Utilization To write of fictitious assets or Only when the company

capital losses etc. is about to wind up.

Share issue
The capital of a company is contributed by a large number of
persons known as shareholders. These shareholders are issued
shares of the company. The accounting of such transactions is
special and involves the share capital account.
Issue Of Shares Issue of shares involves inviting offers from the public to
subscribe to the share capital of a company. The share capital of a public
company is raised by issue of either - equity shares or both equity and
preference shares.
Equity share capital Equity share capital refers to the portion of a
company's capital structure that is raised through the issuance of equity
shares. Equity shares, also known as common shares or ordinary shares,
represent ownership in the company and give shareholders voting rights
and a share in the company's profits.
Preference shares capital Preference share capital refers to a type of
share capital issued by a company that carries certain preferential rights
as regards the payment of dividend either as a fixed amount or at a fixed
rate. to the payment of the paid up capital.
Various accounting stages in the process of issue of shares
For receipt of application money
Bank……………….Dr
To Share Application
For receipt of allotment money
Bank……………….Dr
To Share Allotment
For allotment of shares
Share Allotment……………….Dr
To Share Capital
For making share call money due
Share Call……………….Dr
To Share Capital
For making the allotment money due
Share Allotment……………….Dr
To Share Capital
For receipt of share call money
Bank……………….Dr
To Share Call
Issue of Shares at Par Issue of shares at par means issue of share at
face value. It means that the total amount collected for each share is
equal to the nominal value or face value of shares.
Issue of share at premium Issue of share at premium means issue of
shares at a price higher than its face or nominal value. Premium is the
excess of issue price over face value of the security.
When premium money is payable on application When premium money is
payable on allotment

On receipt of application money

Bank...........Dr
To Share Application
When the allotment money along with premium becomes due
Share Allotment...........Dr
To Share Capital
To Securities Premium
On transfer of share application money
Share Application...........Dr
To Share Capital
To Securities Premium
For receipt of the allotment money
Bank...........Dr
To Share Allotment
Issue of Shares at a Discount When the share of a company are issued
at a price which is lower than its face value or nominal value, the issue is
said to be 'at a discount'. In other words, the excess of the nominal value
of shares over the issue price represents discount on the issue of shares.
Accounting entry for recording discount on issue of shares
Share Allotment...........Dr
Discount on the issue of shares...........Dr
To Share Capital
Calls-in-Arrears After allotment of shares, the company asks the
shareholders to pay their allotment money and call money. Sometimes
some shareholders may fail to pay the amount due on allotment or calls
for various reasons. In such a case, the respective allotment or call
accounts will show debit balance. From the point of view of
company, the total unpaid amount on one or more instalments is
termed as Calls-in-Arrears.
Accounting entry for recording Calls-in-Arrears on issue of shares
If the money due on allotment remains unpaid
Calls-in-Arrears...........Dr
To Share Allotment
If the money due on call remains unpaid
Calls-in-Arrears...........Dr
To Share Call
Interest on Calls-in-Arrears The directors of the company are usually
authorized by the Articles of Association to charge interest at a stipulated
rate on calls-in-arrears. It refers to the additional amount charged by a
company to a shareholder who has not fully paid for their subscribed
shares within the specified timeframe.
For receipt of interest For transfer of interest to P/L account
1. Bank..........Dr
To Interest on Calls-in-arrears
2. Interest on Calls-in-arrears..........Dr
To Profit and Loss

Interest on Calls-in-Advance
The articles of the company usually provide for the rate at which interest
is payable on calls-in-advance. But in case the articles are silent on the
rate of interest, Table A is applicable which leaves the matter to the Board
subject to a maximum rate of 6% p.a. Since the Interest on Calls-in-
Advance is a type of advance received by the company, according to
Table A, the company may pay interest at the rate not exceeding 6 per
cent on such advance call money.
The accounting treatment of interest on Interest on Calls-in-
Advance is as under
On payment of interest on Calls-in-advance
Interest on Calls-in-advance.......Dr
To Bank
On transfer of interest to P/L account
Profit and Loss.......Dr
To Interest on Calls-in-advance

Forfeiture of Share Forfeiture of shares refers to the cancellation or loss

of ownership rights and privileges associated with a particular
shareholding. It typically occurs when a shareholder fails to fulfil certain
obligations or breaches the terms and conditions set by the company or
relevant regulatory bodies.
The accounting treatment related to forfeiture of shares is –
Forfeiture of shares originally issued at par:
When shares are forfeited that were originally issued at par
value, the accounting treatment involves
Where the paid amount was transferred to calls in arrear account
Share Capital…………..Dr
To Calls in Arrear
To Forfeited Shares
Where the unpaid amount has not been transferred to calls in
arrear account
Share Capital…………..Dr
To Respective Calls
To Forfeited Shares
Forfeiture of shares originally issued at discount :
When shares are forfeited that were originally issued at a
discount, the accounting treatment involves :
Share Capital…………..Dr
To Discount on issue on shares
To Calls in Arrear
To Forfeited Shares
In business, there are situations where stakeholder loses its share
because of non-payment of his share of instalment or dues. However, a
company can only forfeit a share if they allow forfeiture under the Article
of Association of the company.
Forfeiture of Shares Meaning
Forfeiture of shares is referred to as the situation when the allotted shares
are cancelled by the issuing company due to non-payment of the
subscription amount as requested by the issuing company from the
shareholder.
In the event of forfeiture of shares, the shareholders loses the rights and
interests of being a shareholder and ceases to be a member of the
organisation.
Some shareholders might fail to pay instalments, viz., allocation of money
or call money. In such a scenario :
 Their share will be forfeited, which means that the shareholder’s
share will be cancelled.
 All the entries associated with the forfeited stocks, apart from those
associated with premium, already mentioned in the accounting
records must have conversed.
 The share capital account is debited with the amount called-up.
Accounting Entries on Forfeiture of Share
Every company according to the situation might issue the forfeited shares
either at a premium or at par.
When Forfeiture of shares Issued at Par– In this situation,
1. The share capital account of a company is debited with the
amount called-upon the current date of forfeiture on shares.
2. The shares call account or shares allotment amount maintains
arrears Account then the called-up balance is credited in that
account.

Journal entry for forfeiture of shares issued at Par :

Date Particular Amount Amount

Share Capital A/c (Called up amount) Dr. ***

To Share Forfeiture A/c (Paid-up Cr. ***

amount)

To Share Allotment A/c Cr. ***

To Share Calls A/c (individually) Cr. ***

(shares forfeited for non–payment of allotment money and calls

made)
Forfeiture of Shares issued at Premium- This situation has two
possibilities,
1. Securities Premium amount has been received- Here, the share
capital amount is debited with the called-up amount and then it
will be credited to Shares Allotment (amount not received on
allotment), Forfeited Shares ( received amount with less
premium), Final Call Account, and First Call.
Journal entry for forfeiture of shares issued at Premium :

Date Particular Amount Amount

 Share Capital A/c Dr. ***

To Share Allotment A/c Cr. ***

To Forfeiture Share Allotment A/c Cr. ***

To First Calls A/c Cr. ***

2. Securities Premium amount has not been received – the share

capital amount is debited with the called-up amount. If securities
premium is not received, securities premium is debited.

Date Particular Amount Amount

Share Capital A/c Dr.

Security Premium A/c Dr. ***

To Share Allotment A/c Cr. ***

To Forfeiture Calls A/c Cr. ***

To First Call A/c Cr. ***

Forfeiture of Shares issued at discount: Shares that are issued

initially at discount and then forfeited. Such discount must be
written off and an adjustment entry needs to be passed. In this
case discount applicable on forfeited shares is written back by
crediting the Discount on Issue A/c.
Following journal entries can be passed:

Date Particulars Amount Amount

Share Capital A/c Dr ****

To Discount on Share Issue A/c ****

 To Share Forfeiture A/c ****

To Share Allotment/Call A/c ****

(For Shares being forfeited for

non-payment)

Reissue of Forfeited Shares

Forfeiture of shares can occur when some of the shareholders are unable
to pay one or more of the installments, which can be allotment money or
call money. In such situations, the company can forfeit the shares, which
is cancelling their allotment.
After the shares are forfeited, the company can re-issue the shares, in this
case it is known as re-issue of forfeited shares or reissue of shares.
For reissue of shares, the company can conduct an auction and dispose of
the shares.The shares can be reissued at any price, but there is a clause,
it states that the total money received on shares should not be less than
the price of shares held in arrears.
Conditions for Re-issue of Shares
There are four situations in which re-issue of shares take place.
1. Forfeited shares reissued at discount when originally issued at
par.
2. Shares reissued at par or at premium, when originally issued at
par.
3. Forfeited shares reissued at par, at discount and at premium
when originally issued at premium.
4. Forfeited shares reissued at par, at discount and at premium,
when originally issued at discount.
Let’s look at the journal entries for the following cases
1. Forfeited shares reissued at discount when originally issued at
par
When shares are reissued at a discount, the bank account will be debited
by the amount received and the share capital account is credited by paid
up amount. The discount allowed will be debited to share forfeited
account.
Journal entries
Bank A/c (the amount received on reissue) Dr.
Share Forfeited A/c (the amount allowed as discount) Dr.
To Share Capital A/c (paid up amount)
If the amount of discount allowed is less than the forfeited amount then
the remaining forfeited amount will be considered as a profit to the
company and accordingly transferred to the capital reserve account
Share Forfeited A/c Dr.
To Capital Reserve A/c
(Transfer of surplus share forfeited amount to capital reserve A/c)
2. Shares reissued at par or at premium, when originally issued at
par
In this case the whole amount that has been credited to Shares Forfeited
A/c is transferred to capital reserve A/c
Journal entries
For shares reissued at par
Bank A/c Dr.
To Share Capital A/c
(Reissue of shares at ₹ per share)
Shares Forfeited A/c Dr.
To Capital Reserve A/c
(Balance amount of Shares Forfeited Account transferred to
Capital reserve account)
For shares reissued at premium
Bank A/c Dr.
To Share Capital A/c
To Securities Premium Reserve A/c
(Reissue of forfeited shares at premium)
Share Forfeited A/c Dr.
To Capital Reserve A/c
(Balance amount of Shares Forfeited A/c is transferred to Capital
Reserve A/c)
3. Forfeited shares reissued at par, at discount and at premium
when originally issued at premium.
Shares that are originally issued at premium need not be reissued at
premium, it can be reissued at par, discount or at premium
On reissuing at premium, the premium received should be credited to the
Securities Premium A/c.
Journal entries
Bank A/c Dr.
(Number of shares × amount received per share)
To Share Capital A/c
(Number of shares × amount paid up per share)
To Securities Premium Reserve A/c
(Number of shares × amount of premium per share)
4. Forfeited shares reissued at par, at discount and at premium,
when originally issued at discount.
When forfeited shares are originally issued at discount are reissued then
discount allowed at the time of original issue is again applicable. On
reissue of shares, the discount on issue of shares account is debited by
the original discount amount.
Journal Entries
Share Capital A/c Dr.
To Share Forfeited A/c
To Discount on Issue of Shares A/c
To Share Final Call A/c
 REDEMPTION OF PREFERENCE SHARES
The redeemable preference shares are redeemed within or at the end of
a fixed period at an agreed price. The redeemable preference shares are
issued by mentioning the terms of repayment. The date of repayment is
also called maturity date. It is generally printed on the share certificate.
Why the redeemable preference shares are issued by the
company?
The company issues redeemable preference shares due to the following
reasons:
1.When the primary market is not attractive to raise finance
2. When the equity market is not in favour of company, issuing of
redeemable preference shares
3.When the company faces over capitalized situation, redemption of
preference shares will be opted for.
Provisions of Companies Act of 2013
A joint stock company limited by shares at its option may issue
redeemable preference shares not exceeding 20 years of maturity from
the date of issue that too when its articles of association permits.
Following are the provisions .
1. Only fully paid shares are to be redeemed
2. Shares are to be redeemed out of the proceeds of fresh issue or from
the divisible profits or from both
3. When the shares are redeemed out of divisible profits, the nominal
amount redeemed from the divisible profit must be transferred to Capital
Redemption Reserve Account
4. Fresh issue can be made at par, premium or discount
5. Redemption of preference shares may be made at par or at premium
but not at a discount
6. When the preference shares are redeemed at premium, the premium
on redemption must be utilised from the balance in the Security Premium
Account. If the Security Premium Account is not available or the balance is
insufficient to pay the premium on redemption, then for the balance,
divisible profit is to be used.

Redemption of preference shares from the proceeds of fresh

issue of shares
This is one of the methods of redeeming the preference shares. The
company in order to redeem its preference shares may issue new equity
shares or preference shares.
Section 52 of the Companies Act, 2013, the Securities Account is
to be utilised for the following purposes:
To issue fully paid bonus shares to the members
To write off the expenses/commission/ discount in connection with the
securities issued by the company
To write off preliminary expenses
In order to facilitate buyback of shares by the company
To provide for the premium on redemption of preference shares or
debentures

Why and when the company will opt for the redemption from the
proceeds of fresh issue?
If the company wishes to reduce its paying burden of fixed dividend (as
the preference shares carries fixed rate of dividend) and if the company
wants to raise capital, it may resort to the issue of fresh equity shares
replacing the already existing preference shares.
In addition to this, if the company has an insufficient balance in the
divisible profits to redeem the preference shares fully, it may resort to the
issuing of fresh shares.
As the company gets cash from fresh issue its liquidity position becomes
good. Methods of redemption of preference shares From the proceeds of
fresh issue From the divisible profits From both Divisible profits The profits
available in the company not distributed that is, retained which is
otherwise available for distribution as dividend among shareholders is
called divisible profits.

In other words, it is that portion of undistributed profits not declared as

dividend but retained in the business. This profit is also called
distributable profits.
Examples for divisible profits: General Reserve/Reserve Fund ,
Dividend Equalisation Fund Profit and loss Account balance
(credit) , Investment Fluctuation Fund ,Workmen’s Compensation
Fund, Insurance Fund ,Contingency Reserve ,Provision for
Doubtful Debts :
JOURNAL ENTRIES
I. For the issue of shares (in order to enable the company redeem
the preference shares from the proceeds of fresh issue)
a. When the new shares are issued at par
Bank A/C Dr
To Equity Share Capital A/C
(Being the entry for the issue of ....... no. of new shares of Rs......
each)
b. When the new shares are issued at a premium
Bank A/C Dr
To Equity Share Capital A/C
To Security Premium A/C
(Being the entry for the issue of ....... no. of new shares of Rs......
each at a premium of .....)
c. When the new shares are issued at a discount
Bank A/C Dr
Discount on Issue of Shares A/C Dr
To Equity Share Capital A/C
(Being the entry for the issue of ....... no. of new shares of Rs......
each at a discount of ....)

II. For the redemption of preference shares

a. When the preference shares are redeemed at par
Redeemable Preference Share Capital A/c Dr
To Redeemable Preference Share holders A/C
(Being the entry for the transfer of preference share capital to
redeemable preference shareholders )
b. When the preference shares are redeemed at a premium
Redeemable Preference Share Capital A/c Dr
Premium on Redemption of Preference shares A/c Dr
To Redeemable Preference Share holders A/C
(Being the entry for the transfer of preference share capital to
redeemable preference shareholders )

c. For the final payment made to preference shareholders

Redeemable Preference Shareholders A/C Dr
To Bank A/C
(Being the entry for the final payment made to redeemable
preference shareholders )

III. For the adjustment of Premium on Redemption of Preference

Shares
a. If adjusted from Security Premium Account
Security Premium A/C Dr
To Premium on Redemption of Preference shares A/c
(Being the entry for the premium on redemption of preference
shares adjusted from security premium account)
Note: For providing the Premium on Redemption of Preference
shares the first preference is to be given to the balance
available in Securities Premium Accountand then to profit &
loss account

Issue of Debentures
The company may either ask for the entire amount to be paid on
the application or use instalments on the application, on the
allotment and on various calls. Debentures are often issued at par,
at a premium or at a reduction. They can even be issued for
consideration aside from cash or as collateral security.

1. Issue of Debentures for Cash

Debentures are said to be issued at par when their issue
price is adequate to the face value.

The journal entries for such issues are as under:

(a ) If the whole amount is received in one instalment:
(i) On receipt of the application money
Bank A/c Dr.
To Debenture Application & Allotment A/c
(ii) On Allotment of debentures
Debenture Application & Allotment A/c Dr.
To Debentures A/c
(b) If the amount is received in two instalments:
(i) On receipt of the application money
Bank A/c Dr.
To Debenture Application A/c
(ii) For adjustment of applications money on the allotment
Debenture Application A/c Dr.
To Debentures A/c
(iii) For allotment money due
Debenture Allotment A/c Dr.
To Debentures A/c
(iv) On receipt of allotment money
Bank A/c Dr.
To Debenture Allotment A/c

(c) If debenture money is received in additional than two

instalments Additional entries:
(i) On making the first call
Debenture First Call A/c Dr.
To Debentures A/c
(ii) On the receipt of the first call
Bank A/c Dr.
To Debenture First Call A/c
Note: Similar entries could also be made for the second call
and final call. However, normally the whole amount is
collected on the application or in two instalments, i.e., on
the application and allotment.

2. Issue of Debentures at a Discount

When a debenture is issued at a price below its par value, it’s said
to be issued at a reduction. For example, the issue of Rs. 100
debentures at Rs. 95, Rs. 5 being the amount of discount.
. The discount on the issue of debentures can be written off
either by debiting it to Statement of Profit and Loss or out
of Securities Premium Reserve A/c, if any, during the
lifetime of debentures.
Discount on issue of debentures to be written off within 12
months of the record date or the amount of operating cycle
is shown under ‘Other Current Assets’ and the part which is
to be written off after 12 months of the record is shown
under ‘Other Non-Current Assets’. The Companies Act, 2013
doesn’t impose any restrictions upon the difficulty of
debentures at a reduction.

3. Debentures issued at Premium

A debenture is claimed to be issued at a premium when the worth
charged is quite its par value. For example, the difficulty of Rs 100
debentures for Rs 110, (Rs 10 is being the premium). The amount
of premium is credited to the Securities Premium reserve fund and
is shown on the liabilities side of the record under the top
“Reserves and Surpluses”.
Over Subscription
When the number of debentures applied for is quite the amount of
debentures offered to the general public, the difficulty is claimed to
be oversubscribed. A company, however, cannot allot more
debentures than it has invited for a subscription. The excess money
received on oversubscription may, however, be retained
for adjustmenttowards allotment and the respective calls to be
made. But the cash received from applicants to whom no
debentures are allotted is going to be refunded to them.

Issue of Debentures for Consideration other than Cash

Sometimes a corporation purchases assets from vendors and rather
than making payment in cash issues debentures for consideration
thereof. Such issue of debentures is named debentures issued for
consideration aside from cash. In that case, also, the debentures
could be issued at par, at a premium or a reduction then entries
made in such a situation are almost like those of the shares issued
for consideration other than cash, which is as follows :
1. On purchase of assets
Sundry Assets A/c Dr.
To Vendor’s
2. On the issue of debentures
(a) At par
Vendors Dr.
To Debentures A/c
(b) At a premium
Vendors Dr.
To Debentures A/c
To Securities Premium Reserve A/c
(c) At a discount
Vendors Dr.
Discount on Issue of Debenture A/c Dr.
To Debentures A/c

Issue of Debentures as a Collateral Security

Collateral security could also be defined as a subsidiary or
secondary or additional security besides the first security when a
corporation obtains a loan or overdraft from a bank or any other
Financial Institution. It may pledge or mortgage some assets as a
 secured loan against the said loan. But the lending institutions may
enforce additional assets as collateral security so that the quantity
of the loan is often realised fully with the assistance of collateral
security in case the amount from the sale of principal security falls
in need of the loan money.
The corporate may issue its debentures to the lenders in addition to
other assets already pledged. Such a problem of debentures is
understood as ‘Debentures issued as Collateral Security.

Redemption of Debentures
Redemption of debentures refers to payment of the amount of debentures by the enterprise. When
debentures are reclaimed, liability on account of debentures is being discharged. To put it in other
words, the amount of capital needed for redemption of debentures is large and, hence, economic
enterprises make adequate provision out of gains and accrue capital to reclaim debentures.

Meaning of Redemption of Debentures

It means repayment of the number of debentures to the debenture

holders.
 Debentures can be redeemed either at par or at a premium.
 The terms and conditions of redemption are usually given in the
prospectus inviting applications for the issue of debentures.
There are 4 ways by which the debentures can be reclaimed. Namely :

1. Payment in lump sum

2. Payment in instalments
3. Purchase in the open market
4. By conversion into shares or new debentures
Methods of Redemption of Debentures:

 Payment in lump sum : The enterprise reclaims the debentures by paying the fund in lump sum (round
sum) to the debenture holders during the maturity hereof as per the terms and conditions of issue.
 Payment in instalments: Under this method, usually redemption of debentures is paid in instalments
on the particular date during the time in the position of the debentures. The total amount of debenture
liability is being divided by the total number of years. This must be noted that the authentic debentures
reclaimable are recognised by the sources of drawing the required number of lots out of the debentures
outstanding for the payment.
 Purchase in open market: When an enterprise buys its own debentures for the aim of cancellation,
such an act of buying and cancelling the debentures comprises redemption of debentures by purchase
in the open marketplace.
 Conversion into shares or new debentures: An enterprise can reclaim its debentures by transforming
them into a new class of debentures or shares. If debenture holders find that the proffer is useful to
them, they can exercise their right of transforming their debentures into new class of debentures or
shares. These new shares or debentures can be either circulated at a premium, at a discount or at par.
It may be noted that this method is applicable only to convertible debentures.

1. Payment in Lump-Sum
Redemption of debentures in lump sum occurs when the total amount
of debentures is paid to debenture holders at one-time at maturity or
even before maturity.
Because the corporation knows the due date in advance, it may
organize its budget accordingly. As a result, the firm must prepare for
such a debenture under the terms of the Companies Act and the SEBI
rules. Debentures can be paid at par or premium according to terms
decided during issuance of debentures.
Journal Entries

1. In case of debenture redeemed at par

 2. In case of debenture redeemed at premium

3. Redemption/Payment made to debenture holder

4. If debenture redeemed out of profit

2.Payment in Installments

This method is also known as the drawing of lots. In this form of debenture
redemption, the borrowed funds are repaid in a series of installments,
which might be regular or irregular.
Journal Entries

1. When debentures are redeemed out of profit

2. When debenture are redeemed out of capital

3.Redemption Through the Purchase from Open Market

In this strategy, the corporation will purchase debentures from the open
market and then cancel them immediately. The corporation might extend
the maturity of the debenture until the payment is appropriate for its
financial resources.

Journal Entries

1. Debentures are purchased at a discount and canceled

2. Debentures are purchased at price above nominal value

3. 0wn debentures are purchased

4. New shares are issued at par

 4. Redemption Through the Conversion

The debentures are redeemed by converting them into fresh class debentures or
shares in this method. The terms and conditions of such a debenture’s
conversion are addressed to the holder when the debenture is issued. New
shares or debentures can be issued at par, a premium, or a reduction at the time
of conversion.
Journal entries

Debentures are redeemed at par

 Practical Problem

Forfeiture of Shares at Par

A company forfeits 100 shares of $10 each fully called upon. The
shareholder has failed to pay the first call money of $3 per share
and the second and final Call Money of $3 per share.

Pass the journal entry.

Solution

Forfeiture of Shares at a Premium

Practical Problem 2
A company forfeits 100 shares of $10 each issued at $11 per
share. The premium was payable on an allotment.

The shareholder failed to pay the allotment money of $3 per

share and the second and final call of $5 per share.

Pass the journal entry.

Solution

Forfeiture of Shares at a Discount

Practical Problem 3
A company forfeits 100 shares of $10 each issued at $9 per share
on account of non-payment of $4 per share by the shareholder.

Pass the journal entry.

Solution

Practical Problem 4
X Ltd. issued 20,000 equity shares of $10 each at a discount of
10%.

The amounts payable are:

 $2 on application

 $3 on allotment
  $5 on final call

Mr. Seth, the holder of 1,000 shares, did not pay the amount due
on call and his shares were forfeited by the company.

Journalize the entries for forfeiture.

Solution

Practical Problem 5
A Ltd. had its issued capital comprising 20,000 equity shares of
$10 each payable as:

 $2 on application

 $3 on allotment (including premium)

 $3 on 1st call

 $3 on final call

The shares were called up to the first call stage.

All the share money was received except from John, holding 300
shares, who paid only application and except from Harry, holding
100 shares, who paid up to the allotment.

All these shares were forfeited.

Solution

Reissue of Forfeited Shares

Practical Problem 6
Mr. John holds 200 shares of $10 each. He had paid on these
shares application money of $2 each, allotment money of $2
each, and first call money of $3 each.

He failed to pay the final call amount of $3 per share. His shares
were forfeited and reissued at $8 per share as fully paid up.

Give the necessary entries to record the forfeiture and reissue.

Solution

Redemption of Preference Shares at Premium

On 1 July 2000, a limited company issued 10,000
redeemable preference shares valued at $10 per share. The
shares were redeemable at a premium of 10%.
Two-fifths of the company's issue was redeemed out of profits on
10 January 2004. On 20 January 2004, the company issued 20,000
equity shares at $10 each at a premium of $4 per share. Out of
the proceeds of the issue, the balance of redeemable preference
shares was redeemed.

Required: Make journal entries to record these transactions in

the company's book
Issue at par, redeemable at par
In this case, the debenture is issued at face value and will pay
back to the debenture-holder at the same value, resulting in no
profit and loss.

Illustration

A company issued 100; 8% debentures of $10 each. The

amount is payable on application and redeemable at par after
four years. Pass the journal entries.

Issue at par, redeemable at premium

Debentures issued at par and redeemable at premium mean
that the company will receive the total face value of the
debentures and will refund the debenture with the premium at
the time of redemption. Thus, it implies that the company will
repay more.

Illustration

Party planners Ltd. issued 7,000; 9% debentures of $100 each

at par and redeemable at a 10% premium. Give the journal
entries for the issue of debentures.
Issue at discount, redeemable at par
Debentures are issued at a discount but redeemable at face
value in this situation. This means the corporation will get less
than the face value but redeem the entire face value.

Illustration

Company ABC issued 100; 9% of debentures at $50 at a

discount of 8%, redeemable at par after 5 years. Pass the
necessary journal entries.

Issue at discount, redeemable at premium

In this case, the company issues debenture at a discount and promises to pay more than face
value at the time of redemption.

Illustration

Green Ltd. issued 400; 9% debentures of $100 each on 1st May 2022. Pass the
journal entries when the debenture is administered at a 5% discount, redeemable
at a premium of 7%.
Issue at premium, redeemable at par
The debentures are issued at a premium in this case. This
means that the company will receive more than the face value
and will only return the face value upon redemption. As a
result, the company will profit from the securities premium.

Illustration

Sultan madad & Co. Ltd issued 600; 9% debentures of $100

each at a premium of 5, redeemable at par. Give the journal
entries.