Company account

Q1. What do you mean by term share/ discuss the types of shares
which can issued under the companies act.

The capital of a company is divided into a number of equal parts. Each part is
called a share. A company may divide its capital into shares of Rs.10, Rs.50, Rs.100
each or any suitable amount, but it is always preferable to have shares of small
denomination in order to bring them within the reach of small investors.

According to Lord Lindley, "The portion of capital to which each member is

entitled to his share". In this way, share is proportionate part of the share capital
and forms ownership in a company.

According to Companies Act, 2013 there are two types of shares-

(i) Preference Share : Preference Share is one which carries the following two
rights-

(a) They have a right to receive dividend at a fixed rate before any dividend is
paid on the equity shares

(b) On the winding up of the company, they have right to return of capital before
the capital returned on equity shares.

However, notwithstanding the above two conditions, a holder of the preference

share may have a right to share fully or to a limited extent in the surplus of the
company as specified in the Memorandum or Articles of the company.

(ii) Equity Share : Under Companies Act 2013, 'an equity share is share which is
not preference share'. Thus, this share does not carry any preferential right or in
other words, equity share is one which is entitled to dividend and repayment of
capital after the claim of preference shares is satisfied. Usually, the equity
shareholders control the affairs of the company and hence has right to all the
profits after preference dividend has been paid.

Q2. What is debenture? Explain the guidelines of SEBI for

creating a debenture redemption reserve?
Understanding Debentures
Before finally getting into the SEBI guidelines for issue of debentures in India, let
us understand the concept of debentures. Debentures are financial instruments
commonly used by corporations as a means of raising capital for their long-term
financial needs. This borrowing is structured into units of smaller denominations,
which can be sold to interested investors.
Characteristics of Debentures
1. Documentary Evidence: A debenture is issued in the form of a document, often
under the company’s official seal, which serves as legal proof of the debt owed
by the company to the debenture holders.
2. Versatility: Debentures can take various forms, including debenture stock,
bonds, or other securities. These instruments may or may not be secured by the
company’s assets.

SEBI Guidelines for creating a debenture redemption

reserve.
Securities and Exchange Board of India (SEBI) have provided some
guidelines for redemption of debentures. The focal point of these guidelines
are:
(i) Every company shall create Debenture Redemption Reserve in case of
issue of debenture redeemable after a period of more than 18 months from
the date of issue.
(ii) The creation of Debenture Redemption Reserve is obligatory only for
non-convertible debentures and non-convertible portion of' partly
convertible debentures:
(iii) A company shall create Debenture Redemption Reserve equivalent to
at least 50% of the amount of debenture issue before starting the
redemption of debenture.
(iv) Withdrawal from Debenture Redemption Reserve is permissible only
after 10% of the debenture liability has already been reduced by the
company.
SEBI guidelines would not apply under the following situations:
(i) Infrastructure company (a company wholly engaged in the business of
developing, maintaining and operating infrastructure facilities), and
(ii) A company issuing debentures with a maturity period of not more than
18 months.

Q3. Give specimen of company’s statement of profit and loss account from
according to the company’s act?

Profit and loss account represents the financial records which

elaborates all the expenses and revenues of an enterprise.

• All companies were universally referred to in updated Schedule VI for

the financial statements to be prepared for the financial year 2010-11
and onward.

• The format of P&L can be referred to as -

1. Revenue from operations - 5,000

2. Other Income - 6,000
3. Total Revenue (1 + 2) - (5,000 + 6,000 = 11,000)
4. Expenses:
Cost of materials consumed - 100
Purchase of Stock-in-Trade - 100
Changes in inventories of finished goods, work-in-progress and Stock-in-
Trade - 200
Employee benefit expense - 100
Financial costs - 200
Depreciation and amortization expense - 200
Other expenses - 100
Total Expenses - (1000)
5. Profit before exceptional and extraordinary items and tax - 15,000
6. Exceptional Items - 5,000
7. Profit before extraordinary items and tax (V - VI) (15,000 - 5,000 =
10,000)
8. Extraordinary Items - 2,000
9. Profit before tax (VII - VIII) (10,000 - 2,000 = 8,000)
10. Tax expense:
(1) Current tax
(2) Deferred tax
11. Profit (Loss) from the period from continuing operations
12. Profit/(Loss) from discontinuing operations
13. Tax expense of discounting operations
14. Profit/(Loss) from Discontinuing operations (XII - XIII)
15. Profit/(Loss) for the period (XI + XIV)
16. Earning per equity share:
(1) Basic
(2) Diluted

Q4. Explain the liquidator’s final statements of accounts?

Screenshot in mobile.

Q5. Write short note on.

1 minimum subscription

2 reserved capitals

3 forfeitures of shares

Minimum subscription: Minimum subscription refers to the minimum number

of shares that a company needs to get out of the entire issue by the date of closure.
Currently, every company is required to raise 90% of the issues amount. Else, the
company is required to refund the complete amount that has been received. The
mentioned 90% has to be the cheques which are not cleared.
Points to remember:

• The infrastructure companies that have a public issue, for them 90% of
minimum subscription is not compulsory and is to be given by an alternative
source through which the fund will be available to the company.
• A legal precedent for Minimum Subscription was created under the
Companies Act of 1956. It states that the company is allowed to offer only a
certain amount of shares to the public, for which the company can actually
pay.
Reserved capital:

A capital reserve is a line item in the equity section of a company's

balance sheet that indicates the cash on hand that can be used for future
expenses or to offset any capital losses. It is derived from the
accumulated capital surplus of a company and is created out of its profit.

The term capital reserve also is used to describe the capital buffers that
banks are required to establish to meet regulatory requirements and can
be confused with reserve requirements, which are the mandatory cash
reserves the Federal Reserve requires banks to maintain.

KEY TAKEAWAYS

• A company's capital reserve is the cash reserved for unexpected

short-term expenses.
• Depending on the business, an adequate capital reserve might cover
three to six months' worth of business expenses.
• A company's capital reserve is not derived from its operations and
therefore should not be used to evaluate the company's financial
health.
• Capital reserves are reported on the equity section of the balance
sheet.
• Companies may invest their capital reserves in low-risk securities,
allowing them to earn a small amount of interest.

Forfeiture of shares:

A company can forfeit shares only when the Articles of Association

of the company contain a provision for share forfeiture. A
shareholder subscribing to the shares of a company owes the
subscription price of the shares to the company. The company may
call upon the shareholder to pay the price in instalments. The
instalment payments are called call money. The call money is due
from the shareholders. Non-payment of the dues can result
in forfeiture of the shares.

To illustrate, if XYZ Ltd makes a public offer of equity shares at Rs

100 per share. Mr A subscribes to 1,000 shares of the company. He
pays 25% of the face value at the time of subscription. The balance
75% is payable in three instalments. The first instalment is paid by
Mr A. However, Mr A defaults on the payment of the second
instalment. Upon such default, XYZ Ltd. is entitled to forfeit the
shares of Mr A. Consequently, Mr A would lose the ownership of
the 1,000 shares, and the money paid amounting to Rs. 50,000.

Q5. Define debentures. Describe various kind of debentures.

Debenture
The word ‘debenture’ itself is a derivation of the Latin word ‘debere’
which means to borrow or loan. Debentures are written instruments
of debt that companies issue under their common seal. They are
similar to a loan certificate.

Debentures are issued to the public as a contract of repayment

of money borrowed from them. These debentures are for a fixed
period and a fixed interest rate that can be payable yearly or half-
yearly. Debentures are also offered to the public at large, like equity
shares. Debentures are actually the most common way for large
companies to borrow money.

Types of Debentures
There are various types of debentures that a company can issue,
based on security, tenure, convertibility etc. Let us take a look at
some of these types of debentures.

• Secured Debentures: These are debentures that are secured

against an asset/assets of the company. This means a charge
is created on such an asset in case of default in repayment of
such debentures. So in case, the company does not have
enough funds to repay such debentures, the said asset will be
sold to pay such a loan. The charge may be fixed, i.e. against
a specific assets/assets or floating, i.e. against all assets of the
firm.
• Unsecured Debentures: These are not secured by any charge
against the assets of the company, neither fixed nor floating.
Normally such kinds of debentures are not issued by
companies in India.
• Redeemable Debentures: These debentures are payable at
the expiry of their term. Which means at the end of a
specified period they are payable, either in the lump sum or
in installments over a time period. Such debentures can be
redeemable at par, premium or at a discount.
• Irredeemable Debentures: Such debentures are perpetual
in nature. There is no fixed date at which they become
payable. They are redeemable when the company goes into
the liquidation process. Or they can be redeemable after an
unspecified long time interval.
• Fully Convertible Debentures: These shares can be
converted to equity shares at the option of the debenture
holder. So if he wishes then after a specified time interval all
his shares will be converted to equity shares and he will
become a shareholder.
• Partly Convertible Debentures: Here the holders of such
debentures are given the option to partially convert their
debentures to shares. If he opts for the conversion, he will be
both a creditor and a shareholder of the company.
• Non-Convertible Debentures: As the name suggests such
debentures do not have an option to be converted to shares or
any kind of equity. These debentures will remain so till their
maturity, no conversion will take place. These are the most
common type of debentures.
Q6. Prepare a specimen of company’s balance sheet in the format.

vertical Balance Sheet Format

Particulars Note No. Figures as of the end of the current reporting p

I. EQUITY AND LIABILITIES

1. Shareholders’ Funds

[Link] Capital XXXX

b. Reserves and Surplus XXXX

c.* Money Received Against Share Warrants XXXX

2. * Share Application Money Pending Allotment

3. Non-current Liabilities

[Link]-term Borrowings XXXX

b.* Deferred Tax Liabilities (Net) XXXX

c.* Other Long-term Liabilities XXXX

[Link]-term Provisions XXXX

4. Current Liabilities

[Link]-term Borrowings XXXX

[Link] Payables XXXX

[Link] Current Liabilities XXXX

[Link]-term Provisions XXXX

Total

II. ASSETS

1. Non-current Assets

a. Fixed Assets
 1. Tangible Assets XXXX

2. Intangible Assets XXXX

3.* Capital Work-in-progress XXXX

4. Intangible Assets under Development XXXX

b. Non-current Investments XXXX

c.* Deferred Tax Assets (Net) XXXX

d. Long-term Loans and Advances XXXX

e.* Other Non-current Assets XXXX

2. Current Assets

[Link] Investments XXXX

[Link] XXXX

c. Trade Receivables XXXX

d. Cash and Cash Equivalents XXXX

e. Short-term Loans and Advances XXXX

f. Other Current Assets XXXX

Total

Q7. What do you understand by redeemable preference shares? State they

account entries of redemption of such shares

Redeemable preference shares are those shares where the issuer of

the share has the right to redeem the shares within 20 years of the
issuance at the predetermined price mentioned in the prospectus at
the time of issuance of preference shares. Before redeeming such
shares, the issuer shall assure that redeemable preference shares are
paid up in full and all the conditions specified at the time of issuance
are fulfilled.
Redeemable Preferences shares are type of preference
shares issued to shareholders with a callable option embedded,
meaning they can be redeemed later by the company.

Practical Example
In the example depicted here, two sets of redeemable preference
shares exist. One of them is 4000 in the count of shares.

• The coupon rate paid by the company for these redeemable

preference shares is 10%.
• For the other, the share count is 2000. The coupon rate paid
by the company for these redeemable preference shares is 9%.

Liabilities Amount Assets

Cash and Bank

Share Capital
Balances

5,000 equity shares of Rs 100 fully paid 5,00,000 Other Assets

4,000 10% redeemable preference shares of 50 each, Rs 25

1,00,000
per share paid

2,000 9% redeemable preference shares of Rs 100 fully paid 2,00,000

Reserves and Surplus

Security Premium A/c 10,000

Capital Redemption Reserve A/c 1,00,000

 Dividend Equalisation Fund 1,10,000

Sundry Liabilities 80,000

Q7. what are current assets? Give four examples of such assets.

A current asset, also called a current account, is either cash or a

resource that are expected to be converted into cash within one
year.

These resources are often referred to as liquid assets because they

are so easily converted into cash in a short period of time. Take
inventory for example. Inventory can easily be sold for cash in the
next 12 months. Contrast that with a piece of equipment that is
much more difficult to sell. Also, inventory is expected to be sold in
the normal course of business for retailers. Equipment, on the other
hand, are not.
This concept is extremely important to management in the daily
operations of a business. As monthly bills and loans become due,
management must convert enough current resources into cash to
pay its obligations.
Cash – Cash is all coin and currency a company owns. This includes
all of the money in a company’s bank account, cash registers, petty
cash drawer, and any other depository. This can include domestic
or foreign currencies, but investments are not included.

Examples of current assets are:

(i) Cash in hand/cash at bank
(ii) Bill receivables
(iii) Debtors
(iv) Raw materials
Q8. How are unrealized profit calculated? How are they used at
the time of preparing consolidated balance sheet

Ans. When the value of an investment increases above the cost of

investment, that is unrealised profit. It is the possibility of profits an investor
can make if they sell their investment at that point.

How do you calculate unrealised profit and loss?

Ans. You can calculate unrealised profit or loss by finding the difference
between the market value of the stock and the price at which you bought
it.

In short, holding company's share of unrealized profit should be

deducted from the Consolidated Stock in the assets side of the
Consolidated Balance Sheet and the same amount should also be
deducted from the Profit and Loss Account in the Consolidated
Balance Sheet.