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karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES:

A company form of organisation is the third stage in the evolution of forms of organisation. Its capital is contributed by a large number of persons called shareholders who are the real owners of the company. But neither it is possible for all of them to participate in the management of the company nor considered desirable. Therefore, they elect a Board of Directors as their representative to manage the affairs of the company. In fact, all the affairs of the company are governed by the provisions of the Companies Act, 1956. A company means a company incorporated or registered under the Companies Act, 1956 or under any other earlier Companies Acts. According to Chief Justice Marshal, “a company is a person, artificial, invisible, intangible and existing only in the eyes of law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence”.

A company usually raises its capital in the form of shares (called share capital) and debentures (debt capital.) This chapter deals with the accounting for share capital of companies.

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

Features of a Company A company may be viewed as an association of person who contribute money or money’s worth to a common inventory and use it for a common purpose. It is an artificial person having corporate legal entity distinct from its members (shareholders) and has a common seal used for its signature. Thus,it has certain special features which distinguish it from the other forms of organisation.

These are as follows:

  • Body Corporate: A company is formed according to the provisions of Law enforced from time to time. Generally, in India, the companies are formed and registered under Companies Law except in the case of Banking and Insurance companies for which a separate Law is provided for.
  • Separate Legal Entity: A company has a separate legal entity which is distinct and separate from its members. It can hold and deal with any type of property. It can enter into contracts and even open a bank account in its own name.
  • Limited Liability: The liability of the members of the company is limited to the extent of unpaid amount of the shares held by them. In the case of the companies limited by guarantee, the liability of its members is limited to the extent of the guarantee given by them in the event of the company being wound up.
  • Perpetual Succession: The company being an artificial person created by law continues to exist irrespective of the changes in its membership. A company can be terminated only through law. The death or insanity or insolvency of any member of the company in no way affects the existence of the company. Members may come and go but the company continues.
  • Common Seal: The company being an artificial person, cannot sign its name by itself. Therefore, every company is required to have its own seal which acts as official signatures of the company. Any document which does not carry the common seal of the company is not binding on the company.
  • Transferability of Shares: The shares of a public limited company are freely transferable. The permission of the company or the consent of any member of the company is not necessary for the transfer of shares. But the Articles of the company can prescribe the manner in which the transfer of shares will be made.
  • May Sue or be Sued: A company being a legal person can enter into contracts and can enforce the contractual rights against others. It can sue and be sued in its name if there is a breach of contract by the company.

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

Kinds of Companies

Companies can be classified either on the basis of the liability of its members or on the basis of the number of members. On the basis of liability of its members the companies can be classified into the following three categories:

(i) Companies Limited by Shares: In this case, the liability of its members is limited to the extent of the nominal value of shares held by them. If a member has paid the full amount of the shares, there is no liability on his part whatsoever may be the debts of the company. He need not pay a single paise from his private property. However, if there is any liability involved, it can be enforced during the existence of the company as well as during the winding up.

(ii) Companies Limited by Guarantee: In this case, the liability of its members is limited to the amount they undertake to contribute in the event of the company being wound up. Thus, the liability of the members will arise only in the event of its winding up.

(iii) Unlimited Companies: When there is no limit on the liability of its members, the company is called an unlimited company. When the company’s property is not sufficient to pay off its debts, the private property of its members can be used for the purpose. In other words, the creditors can claim their dues from its members. Such companies are not found in India even though permitted by the Companies Act, 1956.

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

On the basis of the number of members, companies can be divided into two categories as follows:

(i) Public Company: A public company means a company which (a) is not a private company, (b) has minimum paid up capital of Rs. 5 lakh rupees or such higher paid-up capital, as may be prescribed and (c) is a company which is not a subsidiary of a private company.

(ii) Private Company: A private company is one which has a minimum paid up capital of Rs. 1 Lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles: (a) restricts the right to transfer its shares; (b) limits the number of its members to fifty (excluding its employees); (c) prohibits any invitation to the public to subscribe for any shares in or debentures of the company. (d) prohibits any invitation or acceptance of deposits from person other than its members, directors, and relatives.

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

Share Capital of a Company A company, being an artificial person, cannot generate its own capital which has necessarily to be collected from several persons. These persons are known as shareholders and the amount contributed by them is called share capital. Since the number of shareholders is very very large, a separate capital account cannot be opened for each one of them. Hence, innumerable streams of capital contribution merge their identities in a common capital account called as ‘Share Capital Account’.

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

Nature and Classes of Shares Shares, refer to the units into which the total share capital of a company is divided. Thus, a share is a fractional part of the share capital and forms the basis of ownership interest in a company. The persons who contribute money through shares are called shareholders.

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

The amount of authorised capital, together with the number of shares in which it is divided, is stated in the Memorandum of Association but the classes of shares in which the company’s capital is to be divided, along with their respective rights and obligations, are prescribed by the Articles of Association of the company. As per Section 86 of The Companies Act, a company can issue two types of shares (1) preference shares, and (2) equity shares (also called ordinary shares).

karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

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karnataka class 12 commerce Accountancy CH6 ACCOUNTING FOR SHARE CAPITAL AND DEBENTURES

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