Company Accounts Basics

COMPANY ACCOUNTS

 

 INTRODUCTION TO COMPANY:

1. INTRODUCTION:

The never-ending human desire to grow and grow further has given rise to the expansion of business activities, which in turn has necessitated the need to increase the scale of operations so as to provide goods and services to the ever increasing needs of the growing population of consumers. Large amount of money, modern technology, large human contribution etc. is required for it, which is not possible to arrange under partnership or proprietorship. To overcome this difficulty, the concept of ‘company’ or corporation came into existence.

While the invention of steam power ignited the human imagination to build big machines for the mass production of goods, the need to separate the management form ownership gave birth to a form of organistion today known as ‘company’

Company form of organization is one of the ingenious creations of human mind, which has enabled the business to carry on its wealth creation activities through optimum utilization of resources. In course of time, company has become an important institutional form for business enterprise, which has carved out a key place for itself in the field of business operations as well as in the wealth generating functions of society.

2. MEANING OF COMPANY:

The word ‘company’ in everyday usage, implies an assemblage of persons for social purpose, companionship or fellowship. As a form of organization, the word company implies a group of people who voluntarily agree to form a company.

The word ‘Company’ is derived from the Latin word ‘com’ i.e. with or together and ‘panis’ i.e. bread. Originally the word referred to an association of persons or merchant men discussing matters and taking food together. and registered und any of the previous company laws. As per the definition of law, However, in law ‘company’ is termed as company which is formed and incorporated under the Companies Act, 2013 or an existing company formed there must be group of persons who agree to form a company under the law and once so formed; it becomes a separate legal entity having perpetual succession with a distinct name of its own and a common seal. Its existence is not affected by the change of members.

Company begs its origin in law. It is an organization consisting of individuals, called shareholders by virtue of holding the shares of a company, who are authorized by law to elect a board of directors and, through it to act as a separate legal entity as regards its activities. Generally, the capital of the company consists of transferable shares, and members have limited liability.

To get to the heart of the nature of the company, let us examine the concept of company propounded und corporate jurisprudence.

According to Justice Marshal “A corporate is an artificial being, invisible, intangible and existing only in the contemplation of law.”

In the same manner, Lord Justice Hanay has defined a company as “an artificial person created by law with a perpetual succession and a common seal.”

As per section 2(20) of the Companies Act, 2013 “Company” means a company incorporated under this Act or under any previous company law.

A common thread running through the various definitions of ‘company’ is that it is an association of persons created by law as a separate body for a special purpose. At the same time, definitions have laid down certain characteristics of a corporate organization, which make it out as a separate and unique organization which enables the people to contribute their wealth to the capital of the company by subscribing to its shares and appointing elected representatives to carry out the business.

3. SALIENT FEATURES OF A COMPANY:

1.      Incorporated Association: A Company comes into existence through the operation of law. Therefore, incorporation of company under the companies Act is must. Without such registration, no company can come into existence. Being created by law, it is regarded as an artificial legal person.

2.      Separate Legal Entity: A Company has a separate legal entity and is not affected by changes in its membership. Therefore, being a separate business entity, a company can contract, sue and be sued in its incorporated name and capacity.

3.      Perpetual Existence: Science Company has existence independent of its members; it continues to be in existence despite the death, insolvency or change of members.

4.      Common Seal: Company is not a natural person; therefore, it cannot sign the documents in the manner as a natural person would do. In order to enable the company to sign its documents, it is provided with a legal tool called ‘Common Seal’. The common seal is affixed on all documents by the person authorized to do so who in turn puts his signature for and on behalf of the company.

5.      Limited Liability: The liability of every shareholder of a company is limited to the amount he has agreed to pay to the company on the shares allotted to him. If such shares are fully paid-up, he is subject to not further liability.

6.      Distinction between Ownership and Management: Since the number of shareholders is very large and may be distributed at different geographical locations, it becomes difficult for them to carry on the operational management of the company on a day to day basis. This gives rise to the need of separation of the management and ownership.

7.      Not a citizen: Company is not a citizen like a natural person. Because it is created by the process of law. It has a legal existence but does not enjoy the citizenship rights and duties as are enjoyed by the natural citizens.

8.      Transferability of share: The capital is contributed by the shareholder through the subscription of shares. Such shares are transferrable by its member except in case of private company.

9.      Maintenance of Books: A Limited company is required to prepare and maintain its books of account by law. The failure in this regard is punishable.

10.  Periodic Audit: A company has to get audit its account by the charted accountant. Appointed for the purpose of shareholder recommended by board of directors.

11.  Right to Access to Information: The shareholders have a right to inspect the books of account of the company. the shareholders have a right to seek information from the directors by participating in the meetings of the company and through the periodic reports.

4. TYPES OF COMPAY:

1.      Government Company: According to section 2(45) Government company means any company in which not less than fifty one percent of the paid up share capital is held by the Central Government or by any State Government or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government Company.

2.      Foreign Company: According to section 2(42) Foreign company means any company or body corporate incorporated outside India which-

(a)    Has a place of business in India whether by itself or through an agent physically or through electronic mode; and

(b)   Conducts any business activity in India in any other manner.

3.      private company: According to section 2(68) Private company means a company having a minimum paid-up share capital of one 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)   Except in case of one person company, limits the number of its members to two hundred;

                                i.      Provided that where two or more persons hold one or more share in a company jointly, they shall, for the purposes of this sub-clause, be treated as a single member.

                           ii.         Provided further that Person who are in the employment of company, and Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of member; and

(c)    Prohibits any invitation to the public to subscribe for any securities of the company.

4.      Public Company: According to section 2(71) Public Company means a company which (a) is not a private, (b) has a minimum paid up share capital of five lakh rupees or such higher paid-up capital as may be prescribed; Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.

5.      One Person Company: Section 2(62) of the Companies Act 2013 defines One Person Company means a company which has only one person as a member.

6.      Small Company: Section 2(85) of the Companies Act 2013 defines Small Company as  a company, other than a public company:

(a)    Paid up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees, or

(b)   Turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not more than twenty crore rupees.

7.      Listed Company: According to Section 2(52) of the Companies Act 2013, ‘Listed Company’ means which has any of its securities listed on recognize stock exchange. The company whose shares are not listed on any recognized stock exchange is called ‘Unlisted Company’.

8.      Unlimited Company: As per section 2(92) Unlimited Company means a company not having any limit on the liability of its members.

9.      Company Limited by Guarantee: According to section 2(21) of the Companies Act 2013 Company Limited by Guarantee means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

10.  Company Limited by Shares: As per section 2(22) of the Companies Act 2013 Company Limited by Shares means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.

11.  Holding Company: Section 2(46) of the Companies Act 2013 defines Holding Company as a company  in relation to one or more other companies, means a company of which such companies are subsidiary companies. A company who hold 51 or more percent share of other company is become holding company of such company.

12.  Subsidiary Company: Section 2(87) of the Companies Act says Subsidiary Company means a company in relation to any other company (that is to say the holding company means a company in which the holding company –

(i) Controls the composition of the Board of Directors or

(ii) Exercises or controls more than one half of the total share capital either at its own or together with one or more of its subsidiary companies.

5. MAINTENANCE OF BOOKS OF ACCOUNT:

As per Section 128 of the Companies Act, 2013 every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which gives a true and fair view of the state of the affairs of the company, including that of its branch office or offices if any and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of accounting.

                  Provided further that the company may keep such books of account or other relevant paper in electronic mode in such manner as may be prescribed.

6. PREPARATION OF FINANCIAL STATEMENT:

Under Section 129 of the Companies Act, 2013, the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the notified accounting standards and shall be in the form or forms as may be provided for different class or classes of companies, as prescribed in Schedule III. The Board of Directors of the company shall put financial statements at every annual general meeting of a company.

Financial Statements as per Section 2 (40) of the companies Act, 2013, inter-alia include-

a)      A Balance Sheet as at the end of the financial year

b)      A Profit and Loss account, or in the case of a comp0any carrying on any activity not for profit an income and expenditure account for the financial year,

c)      Cash flow statement for the financial year,

d)     A statement of changes in equity, if applicable; and

e)      Any explanatory note annexed to, or forming part of, any document referred to in sub- clause (i)  to sub-clause (iv):

Provided that the financial statement, with respect of One Person Company , small company and dormant company, may not include the cash flow statement.

Requisites of Financial Statement:

It shall give a true and fair view of the state of affairs of the company as at the end of the financial year.

Provisions Applicable:

(1) Specific Act is Applicable;

For instance any

(i) Insurance company

(ii) Banking company

(iii) Any company engaged in generation or supply of electricity[1] or

(iv) Any other class of company for which a Form of balance sheet or Profit and loss account has been prescribed under the Act governing such class of company.

(2) In case of all other companies

Balance Sheet as per Form set out in Part I of Schedule III and Statement of Profit and Loss as per Part II of Schedule III.

Schedule III of the Companies Act 2013.

As per section 129 of the Companies Act, 2013, financial statements shall give a true and fair view of the state of affairs of the companies and comply with the accounting standards notified under section 133 and shall be in the form of forms as my be provided for different class or classes of companies in Schedule III under the Act.

FORMET OF FINANCIAL STATEMENT

PART- I :-  FORM OF BALANCE SHEET

___________Limited

Balance Sheet as on 31-3____

	Particulars	Note No.	Figure as at end of the current reporting period	Figure as at end of the previous reporting period
I.	EQUITY AND LIABILITIES:
(1)	Shareholder’s Funds:
	(a)    Share Capital
	(b)   Reserve and Surplus
	(c)    Money Received against share warrants
(2)	Share Application Money Pending Allotment
(3)	Non Current Liabilities:
	(a)    Long Term Borrowings
	(b)   Deferred Tax Liabilities (Net AS-22)
	(c)    Other Long Term Liabilities
	(d)   Long Term Provisions
(4)	Current Liabilities:
	(a)    Short Term Borrowings
	(b)   Trade Payables
	(c)    Other Current Liabilities
	(d)   Short Term Provisions
	Total
II	Assets:
(1)	Non- Current Assets:
	(a) Fixed Assets:
	(i)                  Tangible Assets
	(ii)               Intangible Assets
	(iii)             Capital Work in Progress
	(iv)             Intangible Assets under Development
	(b) Non-Current Investment
	(c) Deferred Tax Assets (Net as per AS 22)
	(d) Long Term Loans and Advances
	(e) Other Non-Current Assets
(2)	Current Assets
	(a) Current Investment
	(b) Inventories
	(c) Trade Receivables
	(d) Cash and Cash Equivalents
	(e) Short term Loans and Advances
	(f) Other Current Assets
	Total

PART –II:-  FORM OF STATEMENT OF PROFIT AND LOSS

___________Limited

Profit and Loss Account for the year ended on 31-3____

	Particulars	Note No.	Figure as at end of the current reporting period	Figure as at end of the previous reporting period
I.	Revenue from operation
II.	Other Incomes
III.	Total Revenue (I + II)
IV.	Expenses:
	Manufacturing Expenses:
	Cost of Material Consumed
	Purchases of Stock in Trade
	Changes in Inventories of Finished Goods
	Work in Progress and Stock in Trade
	Other Manufacturing Expenses
	Administrative And Selling Expenses:
	Employee Benefit Expenses
	Other Administrative and Selling Expenses
	Depreciation and Amortization Expenses
	Finance Costs
	Other Expense
	Total Expenses
V.	Profit before exceptional and extraordinary items
	and tax (III – IV)
VI	Exceptional Items (related to business activity but
	Not recurring nature)
VII	Profit before Extraordinary Items and Tax (V – VI)
VIII	Extra Ordinary items (Mainly due natural
	Calamities legal suits etc.)
IX	Profit before Tax (VII – VIII)
X	Tax Expenses:
	(1)   Current Tax
	(2)   Deferred Tax
XI	Profit/(Loss) for the period from
	continuing operation (X – XI)
XII	Profit/Loss form Discontinuing Operations
XIII	Tax Expenses of Discontinuing Operations
XIV	Profit/(Loss) for the period from
	Discontinuing operation (XII – XIII)
XV	Profit/(Loss) for the Period (XI + XIV)
XVI	Earning Per Equity Share as per AS20
	(1)   Basic
	(2)   Diluted

Probable Questions to be asked in examination:

Theoretical Questions:

1.     Explain the meaning of company and its salient features.

2.     What is company? Write a brief not on various types of companies.

3.     Give distinction between:

a)     Public Limited Company and Private Limited Company

b)    Public Limited Company and Government Company

c)     Company Limited by Shares and Company Limited by Guarantee

4.     Write a short note on:

a)     Maintenance of Books of Account

b)    Preparation of Financial Statement

c)     Holding and Subsidiary Company

d)    Small Company

Multiple Choice Questions:

1. Which of the following statement is not a feature of a Company?

(a) Separate legal entity, (b) Common Seal, (c) Perpetual Succession, (d) Members have unlimited liability.

2. In a Government Company, the holding of the Central/State Government in paid-up capital should not be less than:

(a) 25%, (b) 50%, (c) 51%, (d) 75%

3. Which of the following statement is true in case of a Foreign Company?

(a) A Company incorporated in India and has place of business outside India.

(b) A Company incorporated outside India and has a place of business in India.

(c) A Company incorporated in India and has a place of business in India.

(d) A Company incorporated outside India and also has a place of business outside India.

4. Public Companies should have a minimum paid-up capital of:

(a) Rs.5 lakhs, (b) Rs. 10 lakhs, (c) Rs.15 lakhs, (d) Rs.50 lakhs

5. Private Company should have a minimum paid-up capital of:

(a) Rs.1 lakhs, (b) Rs. 5 lakhs, (c) Rs.10 lakhs, (d) Rs.25 lakhs

6. Which of the following statements is not a feature of a private company?

(a) Restricts the rights of members to transfer its shares.

(b) Do not restrict on the number of its members to any limit.

(c) Prohibits any invitation to the public to subscribe its shares or debentures.

(d) Do not involve participation of public in general

7. One person company means in which:

(a) One person as a member, (b) One share hold by so many member, (c)  It is not company but sole trader business, (d) Small company

8. Presently which of the following companies act followed in Indian?

(a) Companies Act 1956, (b) Companies Act 2013, (c) Companies Act 1932, (d) Companies Act 1961

9. Who are the owners of the company?

(a) Directors, (b) Promoters, (c) Government, (d) Shareholders

10. A company should maintain its books of account on the:

(a) Accrual basis, (c) Cash basis, (c) Mix basis, (d) as decided by the directors of the company.

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[1] The Electricity Act 2003 does not specify any format for presentation of Financial Statements. Therefore, schedule III of the companies Act, 2013 is followed by Electricity companies in preparation of their financial statement.