A company is an artificial person created by law, having separate legal entity with a perpetual succession and a common

seal.
Features of a company
1. Separate legal entity: a company is a separate legal entity different from the owners of the business.
2. Perpetual existence: the existence of a company is not affected by the retirement, death or insolvency of its
members. It will continue indefinitely in the long period of time.
3. Limited liability: the liability of the shareholder is limited to the unpaid value of his shares.
4. Common seal: since the company has no physical existence, it must act through its agents called directors. All
documents prepared by the directors must bear the seal of the company. The common seal acts as the official
signature of the company.
5. Transferability of shares: the capital of the company is divided into parts called shares. The shares are freely
transferrable subject to the provision of articles of association.
6. Separation of management from ownership: shareholders are the true owners of the company, but usually the
number of shareholders is quite large and as such it is neither possible nor desirable for each member to take part
in the day to day management of the company. Therefore the company is managed by a Board of directors
elected by shareholders.
Kinds of a company
Companies registered under the company act 1956 may be classified as below
1. Unlimited company: in this company the liability of the members of the company is unlimited. If a company
suffers loss and the companys assets are not sufficient to pay off its debts, then the private property of the
members will be used to meet the claim of creditors.
2. Company limited by guarantee: in case of such company the liability of the members is limited to the extent of
guarantee given by them in the event of winding up of the company. The liability of its members will arise only
in the event of winding up of the company.
3. Company limited by shares: in case of such company the liability of the member is strictly limited to the extent
of the nominal value shares held by each of them.
a. Private company
b. Public company
Difference between Private Company and Public Company
Basis of Distinction
Number of members

Number of directors
Paid up capital
Accepting deposits
Invitation to the public

Transfer of shares
Preparation of Articles
Commencement of business

Private company
Minimum 2 members and the
maximum exclusive of the past
and present employees is 50
It must have at least 2 directors
It should have minimum paid up
capital of Rs 100000
It cannot accept public deposits
It cannot invite the public to
subscribe to its shares
There is restriction on the
transfer of its shares
Preparation of
articles
is
mandatory
It can commence business as

Public Company
Minimum 7 members and there
is no limit to maximum number.
It must have at least three
directors
It should have minimum paid up
capital of Rs 500000
It can accepts public deposits
It can invite public to subscribe
to its shares
There is no restriction on the
transfer of its shares
It is not mandatory
In addition to certificate of

soon
as
certificate
incorporation is received

of

incorporation, it must also obtain

the certificate of commencement
of business

Statutory meeting

It is not required to hold statutory

meeting

Use of word limited

It is compulsory to use the words

Private limited at the end of its
name

It is required to hold statutory

meeting within 6 months of its
getting
the
certificate
of
commencement of business
Only the word limited is used at
the end of its name.

Sweat Equity shares: it means equity shares issued by the company to its employees or directors at a discount or for
consideration other than cash for providing know how or making available intellectual property rights. Such shares
cannot be resold by their holders within a period of 3 years called lock in period. It is to be noted that a company may
issue sweat equity shares at a price lower than the nominal value of equity share.
Preliminary expenses: expenses incurred on the formation of company which include the following:
1. Expenses incurred on the preparation and printing of various documents needed for the registration of the
company.
2. Stamp fee and registration fees on these documents.
3. Duty payable on authorized capital
4. Cost of preliminary books and the common seal
5. If a company has been formed to purchase a running business, the fees charged by the accountant or valuer
valuing the assets and liabilities of that business.
As per AS-26 the preliminary expenses are to be written off in the year in which they are incurred. They should be
written off first from the security premium account and in its absence from the profit & loss in the same year.
Under- Subscription of Shares
Sometimes, number of shares applied for by the public is less than the number of shares offered by the company. Such an
issue is said to be under subscribed. In such case the accounting entries are made on the basis of the number of shares
applied for.
Calls in arrears
When some shareholders fail to pay the allotment amount or call amount when due, this is known as calls in arrears.
There are two methods to deal with calls in arrears:
1. Without opening calls in arrear account: in this method there is no need to open calls in arrear account. In
such case the actual amount received from the shareholders is credited to the call account and unpaid amount of
call is debited to the call account. On a subsequent date when an unpaid amount is received, bank account is
debited and relevant call a/c is credited.
2. By opening calls in arrear account: in this method the calls in arrear account is opened and debited with the
unpaid amount of call. On a later date when the arrear mount is received, bank account is debited and the call in
arrear account is credited.
Example: suppose X ltd company made a first call of Rs 2 per share its 10000 shares. One shareholder holding 500
shares did not pay the first call. But when the company made final call of Rs 3 per share, he paid all his arrears.

First Method:
On making first call due
Share first call a/c ..Rs 20000
To share capital a/c Rs 20000
On receipt of first call
Bank a/c..Rs 19000
To Share first call a/c..Rs 19000
On making final call due:
Share final call a/c ..Rs 30000
To share capital a/c Rs 30000
On receipt of final call
Bank a/c..Rs 31000
To Share final call a/c..Rs 30000
To Share first call a/c..Rs 1000
Second Method:
On making first call due
Share first call a/c ..Rs 20000
To share capital a/c Rs 20000
On receipt of first call
Bank a/c ..dr. Rs 19000
Call in arrear a/c.dr. Rs 1000
To Share first call a/c..Rs 20000
On making final call due:
Share final call a/c ..Rs 30000
To share capital a/c Rs 30000
On receipt of final call
Bank a/c..Rs 31000
To Share final call a/c..Rs 30000
To call in arrear a/c..Rs 1000
Interest on Calls in arrear
The company is authorized to charge interest on calls in arrear at a specified rate mentioned in its articles from due date
to the date of actual payment. But if the articles are silent, then Table A shall be applicable, according to which interest
rate of 5% per annum shall be charged.
Journal entry for recording interest on calls in arrears:

1. When interest on calls in arrear is due to be received from members

Sundry members a/c..dr
To interest on calls in arrear
2. On receipt of interest on calls in arrear
Bank a/c.dr
To sundry members a/c
3. By transferring the interest on calls in Arrear to Profit & loss a/c at the end of accounting period
Interest on calls in arrear..dr
To profit & loss a/c
Call paid in advance
Sometime a shareholder may pay part or whole amount not yet called upon his shares in order to save himself the
trouble of paying different calls at different times. According to section 92 of the companies act, such future calls in
advance can be accepted by the company only when its Articles of Association authorizes to do so.
Journal entries for call paid in advance
On receipt of calls in advance
Bank a/c..dr
To Calls in advance a/c
Calls in advance a/c is shown as current liabilities
In future when the call is made by the directors the following entries will be passed
Share call a/c.dr
To share capital a/c
(when amount becomes due on call on all shares including those on which call has been received in advance)
On receipt of call money
Bank a/c ..dr (with the amount actually received)
Call in advance a/c.dr (with the amount of the call received in advance)
To share call a/c
(call in advance adjusted)
Interest on calls in advance
If a company is authorized by its Articles to accept Calls in advance, the Articles must also state the rate of interest
payable on calls in advance. If a company has adopted Table A, it is required to pay 6% per annum on the amount of calls
in advance. The interest is payable even if there are no profits. No dividend is payable on calls in advance since the
amount of Calls in advance is not a part of share capital
Interest due on call in advance
Interest on calls in advance a/c.dr
To sundry member a/c
On payment of interest on calls in advance
Sundry member a/c
To bank a/c

On transfer of interest on calls in advance to profit & loss account

Profit & loss a/c..dr
To interest on calls in advance a/c
Over subscription of shares
Shares are said to be oversubscribed when the number of shares applied for is more than the number of shares offered to
the public for subscription. However the company cannot allot shares more than that offered for subscription; the board
of directors will have to allot shares on pro-rata basis. It means that the smaller numbers of shares are allotted to each
applicant according to the number of shares applied by him.
Suppose X ltd company invited application for issuing 100000 equity shares of Rs 10each a premium of rs 3 per share.
The whole amount was payable on application. The issue was oversubscribed by 30000 shares and the allotment was
made on pro-rata basis.
On receipt of application money on 130000 shares at the rate of Rs 13 per share
Bank a/c dr Rs 1690000
To equity share application a/c .Rs 1690000
Equity share application a/c..dr Rs 1690000
To equity share capital a/cRs 1000000
To security premium a/c.Rs 300000
To bank a/c .Rs 390000
(Application money adjusted)
Note: application money has been received for 130000 shares but they have been allotted only for 100000 shares on
proportionate basis and application money received on 30000 shares has been returned to them.
There may be some applicants who are not allotted any shares. The application money received from these applicants is
returned to them.
Share application a/cdr
To bank a/c
When some applicants are allotted smaller number of shares, the excess amount received on applications is utilized
towards the amount due on allotment
Share application a/c.dr
To share allotment a/c
Sometimes the excess application money exceeds even the money due on allotment. Such amount has to be returned.
However it can be retained by the company for its utilization towards future calls if its articles so authorize. If the amount
is retained, it must be transferred to calls in advance a/c by passing the following entry.
Share application a/c.dr
To share allotment a/c
To calls in advance a/c
(Excess application money utilized for allotment and calls)