INTRODUCTION TO COMPANY.
Introduction
In corporate accounting , commerce students have to learn accounting treatment of issue of share
capital , debenture and its redemption , bonus and right issue at graduation level . They also have to
solve the problems of final accounts of different companies . For proper accounting treatment ,
learning of Indian Company Law 1956 is must . So , this topic is being discussed here. If you are
starting to learn Company or Corporate Accounting , then this article will be useful for you because
after reading this article , you will understand , the brief history , meaning , definition of Company and
itssixfeatures
.
History
First of All, in France this word was used for body of soldiers see .. After year 1500, this word became
famousinbusiness.Groupofbusinessmenwascalledcompany.
Example
I can explain the meaning of company with a simple example. Suppose, two persons want to do
business
at
large
scale
but
they
have
limited money.
They
are
also
not
interested
to
make partnership due to its unlimited liability. They go to the office of registrar of companies and fill
the form of creation of company and attaching required documents. They also pay the required fees.
After this, registrar will register their company. This registered company will be independent Identity.
DefinitionofCompany
Indian Company law 1956’s section 3(1) (i) define company, “Company is the organisation which is
formed
and
registered
under
this
law
or
any
previous
law”
ExplanationofCompany
From above example and definition, we can understand that company is voluntary and autonomous
association of persons. This is made for achieving business objectives. It acts like human being.
Company can purchase assets or sell it. It can take also debt. It can open bank account. It is fully free
from
its
members.
Company
is
operated
through
board
of
directors.
Companyvs.Corporation
There is no solid difference between Company and Corporation. But , these days Corporation word is
mostly used in finance area because this word is most popular in USA economy . Media is also
publishing all stories of Industries by using Corporation as keyword in India. All features of Company
like a separate legal entity having its own rights, own property , sign binding contracts , privileges,
and
liabilities
distinct
from
those
of
its
members
can
be
seen
in
Corporation
.
FeatureofCompany:-
1.Separatelegalentity
It is the feature of company that company is not just association of persons but it hasseparate legal
entity. It is an artificial person in the eye of law. Its asset is not the asset of shareholder. It can
contract with members. This feature was firstly accepted in Salomon vs Salomon and Company ltd.
Salomon was the dealer and manufacturer of leather boot and shoe. He had a wife, a daughter and
other five sons. He sold his business to Salomon and company ltd which he made himself he also
made his family as its shareholder. His wife, daughter and his other four sons purchased one share of
this company and rest, he purchased. He purchased £ 20000 shares and £ 10000 shares. After one,
due to economic trouble and other reasons business failed and the company was put into liquidation.
At
that
time
financial
position
of
company
was
Assets
£6000
Debentures
£10000
Unsecured Creditors £
7000
External creditors demanded their money because Solomon and Solomon Company were both one
person and this business was of Solomon and it was being operated by him. It was a fraud. But
TheHouseheld:
"Either the limited company was a legal entity or it was not. If it were, the business belonged to it and
not to Mr. Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is
impossible
to
say
at
The
the
same
time
that
there
House
is
a
company
and
there
is
further
not."
noted:
"The company is at law a different person altogether from the [shareholders] ...; and, though it may
be that after incorporation the business is precisely the same as it was before, and the same persons
are managers, and the same hands received the profits, the company is not in law the agent of the
[shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or
form,
except
to
the
extent
and
in
the
manner
provided
for
by
the
Act."
In end court decided that Solomon and company are different from Solomon and Solomon is secured
creditor.Sohisgivenloanshouldbereturnedfirst.
2.SeparateProperty
It is also feature of company that property of company is different from its members. It can purchase
or sell property without the permission of shareholders. In other words, assets of company are not
the assets ofmemberslikepartnership.
3.LimitedLiability
Limited liability is also another important feature of company. It is the reason that large number
of investors invest in limited liability companies. It is the liability of company to repay not the liability
of its members. Members’ liability is only limited up to the purchased value of shares. They have to
paybalanceamountoftheirshares.
4.PerpetuaSuccession
The life of company is very stable that human being’s life. There is no effect of changing, death,
insolvency of respected member on company. Its existence is not affected by members’ existence.
Shares can easily transfer from one member to another member, so liquidation of company is only
possiblebylaw.
5.CommonSeal
Company can not sign on any contract because it is artificial person and it works with common seal.
Every document of contract with company is only valid, if there is common seal of company on it.
6RighttoSue
Company can sue on other parties like natural person for protecting its assets and properties. Other
persons can also charge on the company.
It is true that no business can operate without fund and fund can be received only by capital or loan .
If company or corporate wants to get capital , it should make some division for this purpose. After this
shares can be issued first time to public . For company accountant , its knowledge is must .
We
can
explain
main
divisions
of
share
capital
of
company
with
following
way
:-
1sRegisteredcapital
That part of total capital with whom company wants to register , that part is called authorised capital .
This the maximum amount that can any company issue to public for getting capital fund . Still there is
not quantity limit for authorised capital determination under Indian Company Act 1956 .
2ndIssuedCapital
It is that part of authorised capital which is offered to public to acquire , that part is called issued
capital
.
3rdSubscribedCapital It is that part of issued capital which is accepted by public. Subscribed capital
can not more than issued capital . If it happen than it will be over subscription and it will be rejected
or
accepted
under
pro-rata
basis
for
providing
proper
accounting
treatment
.
4thCalledupCapital
It is that part of issued capital which is to be paid by shareholders . Company has demanded money of
this part . If shareholder does not pay called up capital , then this part becomes call in arrears .
5thPaidUpcapital
It is that part of called up capital which is paid by shareholders and after this they can become real
ownerofcompany.
6thReservecapital
One company can determine with special resolution that some part of total subscribed capital will not
demanded from shareholder and it is not demand up to the winding up of company . That part of
capital is called reserve capital . It can not be changed in general capital with the permission of Court .
Board of directors also can not change it in normal capital . It is most benefited for company's
creditors . because , this amount can be utilized for payment to creditors at the time of liquidation of
company.
There is no need to do any accounting treatment for reserve capital but a small note is written in
balance sheet in which company mentions the amount of reserve capital and other interested parties
canfocusonthisnote
.
Forinstance
A company has Rs. 20000000 as its authorised capital divide into 1000000 equity shares of Rs. 10
each and 200000 pref. shares of Rs. 50 each. Company issued 800000 equity shares and 100000
preference shares . The public subscribed for 600000 equity shares and 100000 pref. shares . All
shareholders paid the amount with the exceptionof 50000 equity shares @ Rs. 5 per share . Calculate
theamountofvarioustypesofsharecapital
Authorised
.
capital
1000000
200000
equity
pref.
shares
of
shares
Rs.
of
10
Rs.
each
50
→
each
→
Rs.
10000000
Rs.
10000000
___________________________________________
--------------------------------------->
Rs.
20000000
___________________________________________
Issued
Capital
800000
Equity
100000
pref.
shares
of
share
Rs.
of
10
Rs.
50
each
each
→
Rs.
8000000
→
Rs.
5000000
__________________________________________
---------------------------------------->
Rs.
13000000
__________________________________________
Subscribed
capital
600000
equity
shares
of
100000
pref.
share
of
Rs
.
Rs.
10
50
each
each
Rs.
→
Rs.
→
6000000
5000000
___________________________________________
--------------------------------------->
Rs.
11000000
___________________________________________
Called
up
600000
Called
100000
equity
capital
shares
up
only
Rs.
pref.
shares
called
of
8
up
per
@
Rs.
share
Rs.
40
→
each
→
10
each
Rs
4800000
Rs.
4000000
____________________________________________
------------------------------------------------>
____________________________________________
Rs.
8800000
Paid
up
Called
up
equity
of
Rs.
5
paid
up
capital
capital
each
of
capital
less
calls
--------------------------------→
pref.
shares
---------------→
in
Rs.
Rs.
arears
4550000
4000000
_____________________________________________
---------------------------------------------->
Rs.
8550000
_____________________________________________
Shareholder of a Company:
Shareholders or stockholders are the persons or firm or companies who purchase the shares of other
company. They are the real owner of company. Shareholders may be preference shareholders
or equity shareholders.
Equity shareholders can vote in annual general meeting for passing any resolution. Other side
Preference shareholders have preference to getdividend with fixed rate before giving dividend to
equity shareholders. All shareholders have to open demat account if they want to deal in shares. We
have already told you that shareholders are the real owner of company, it means if company suffers
loss then shareholders have no right to get dividend. If company is liquidated, then they can receive
their money only after paying external creditors and debenture holders.
Company has to maintain good relation with shareholders and try hard to bring high rate
on capital which is given in the form of shares because every shareholder wants to increase his share
capital.
Shareholders have to maintain their contact with different company because they are interested
to invest their hard earned money in that place from where they can get highROI. They have to check
the past records from company’s financial statements before investing their money. If any company
wants to encourage shareholders, then it has to maintain fair and reliable financial statements and
show evidence of its best performance with financial statements.
Rights of Shareholders
1. To transfer the shares
2. To get information of meeting of company, take part in it and Vote.
3. To check the registers and copies of receipts and take copies.
4. To take the copies of memorandum of association and article of association.
5. To receive right shares.
6. To obtain annual reports, auditor’s report, profit and loss account and balance sheet’s copies.
7. To sign the proposal of liquidation which is done by Court.
8. To take part in the committee for appointment of liquidator at the time of voluntary liquidation of
company.
Shareholders Vs Members
All registered shareholders are members of company but all registered members may not be
shareholders because some companies establish without share capital.
Shareholders Vs Brokers
All shareholders may not be brokers but all brokers may be shareholders because brokers have right
to deal in share market. If they purchase the shares on the behalf of their customers, they are only
brokers not shareholders of company. But due to representing shareholders in share market, they can
usesomepowersofshareholderswhiletheydeal.
ShareholdersVsStockholders
If
shareholders
purchase
shares
in
sets
form,
then
they
are
said
stockholders.
ShareholdersVsStakeholders
Shareholders may be stakeholders, but stakeholders may be shareholders or may not. Stakeholders
are the persons who are affected by that company's operations - including its shareholders, but also
its bondholders, managers, workers, retired workers, suppliers, customers, and the communities
where it operates.
Labels: Accounting, company, corporate accounting