c) Money received against share warrants
a) SHAREHOLDER'S FUND
Shareholder's fund is the amount the company has collected from its shareholders for operating the business and it is a liability for the company to pay back the amount to its shareholders. The term equity and shareholder's fund is similar in companies.
Share capital
The public company issues its shares to the general public and collects its money called 'share capital'. They can issue both equity share and preference share according to their convenience. In a public limited company equities will be contributed by the share held by its shareholders. In other forms of companies, equity might be contributed by its members like a private company. In sole proprietor business the money invested by the owner of the business is called as capital. In companies there are many owners.
CATEGORIES OF SHARE CAPITAL
a) Authorized Capital
b) Issued Capital
c) Subscribed Capital
d) Paid up capital (division of subscribed capital)
- AUTHORIZED CAPITAL
The maximum amount of share capital the company can collect from its shareholders is called the authorized capital. Authorized capital will be already mentioned in the company's memorandum of association while the formation of the company takes place. The company can't exceed its authorized share capital which it has already mentioned in its MOA. There are provisions for the company to alter its authorized share capital by altering the MOA of the company.
- ISSUED CAPITAL
The amount of share capital that the company has issued for the shareholders to subscribe (buy). Issued capital contains the details of the number of the shares issued by the company, the type of share and the value (price) the the share.
- SUBSCRIBED CAPITAL
Out of the issued capital from the company, the amount of capital that the subscribers have purchased is known as subscribed capital. Here some possibilities arises
a) people purchase the shares by paying the complete amount
b) people buy the shares by paying partial amount or no amount at all
c) the company can ask its subscribers to pay the complete amount of the share
d) the company can ask its subscribers to pay any partial amount of the value of the share.
- PAID UP CAPITAL
The subscribers those who have purchased the shares of the company have to pay the amount of the share. The amount paid by them is called paid up share. Subscribed share capital and paid up capital are connected as paid up capital is only a division of subscribed capital.
Fully paid Not fully paid
When the company asks its subscribers to pay Either the company has not asked the
the complete value (face value) of the share and whole amount of the share or the
the subscribers have also completely paid the subscribers have not paid the whole amount whole amount though the company has asked for it will be categorized as subscribed
but not fully paid.
Forfeited shares
The issued shares which are taken back from its shareholders are called forfeited shares. The company has many reasons for taking back the shares issued from its subscribers. Forfeited shares will be added to share capital. The company may reissue the forfeited share completely or partly, during the reissue the company may gain profit. This profit is a capital gain so it should be transferred to capital reserve.
b) RESERVES AND SURPLUS
Reserves is an amount which is set aside by the enterprise out of its profits. Reserves are created for the purpose of general welfare of the company. Usually reserves can be used in any needy situation of the company until the reserve is not created for a specific purpose.
Surplus is the balance in the profit and loss account which is left after all distributions made, that is after all dividends and reserves the remaining profits which is left over during the year end.
CATEGORIES OF RESERVES
a) Capital Reserve
b) Capital Redemption Reserve
c) Securities Premium Reserve
d) Debenture Redemption Reserve
e) Revaluation Reserve
f) Share Option Outstanding Reserve
CAPITAL RESERVES
Capital reserve are created out of the company's capital profits, that is the transaction should be of capital nature not revenue. Example- sale of fixed asset, capital gains, sale of investment etc. Capital reserves are like a long term investment in the company so it cannot be used for paying dividends to the shareholders.
CAPITAL REDEMPTION RESERVE
The company issues redeemable share which means the company will but back its share after a specific period of time. Capital redemption reserve is created in advance for the company to purchases its own share (redeem). The company buys back its own share out of the available reserves. As per the SEC 52(2) of the companies act this reserve is used for issuing bonus shares.
SECURITIES PREMIUM RESERVE
When the companies collect excess money than the face value (original price) of the share then it will be transferred to securities premium reserve. This reserve money can't be used for any other purpose other than which is stated in the SEC 52(2) of the companies act. This reserve is not created immediately while receiving the application money itself, it is created in the later stage.
Under the section 78 of the Act, securities premium reserve can be used for :
- bonus shares to its members
- writing off preliminary expenses / commission paid
- discount allowed on shares and debentures
DEBENTURE REDEMPTION RESERVE
The debenture holders are the lenders of the company, they have provided the company with money so in order to remove the fear of loss and provide a safe guarantee among the debenture holders the company creates debenture redemption reserve. The debenture redemption reserve is created from the profits of the company to repay the debenture amount at maturity if in case the company goes down or loses its capacity to repay the debenture amount. The company act has made compulsory for the companies to create debenture redemption reserve.
REVALUATION RESERVE
The frequent change in the value of the assets takes place so to face these fluctuations revaluation reserve is created. The revaluation reserve reduces whenever there is a fall in the value of the asset.
SHARES OPTION OUTSTANDING RESERVE (stock option)
The company can issue its share to its employees, when they issue this share option to its employees the price of the share is lesser that its face value (original value). The difference amount is met by creating this a reserve called share option outstanding reserve.
c) MONEY RECEIVED AGAINST SHARE WARRANTS
Share warrants are the instruments which give the right to its holder to acquire (buy) the companies share at a specific rate at a specific time. In simple words these share warrants can be converted into equity share of the company at a specific date. It is like a guarantee for the shareholders.
2) LIABILITIES
Liabilities are the amount the company has to pay to the outsiders of the company. Liabilities are external in nature. The outsiders are among the external stakeholders of the company.
a) Non Current Liabilities
b) Current Liabilities
a) NON CURRENT LIABILITIES
The liabilities which are not expected to be settled within the operating cycle of the company or twelve months of time. Non current liabilities are long term, the are usually settled in longer period of time.
a) Long Term Liabilities
b) Deferred Tax Liabilities
c) Long Term Liabilities - Others
d) Long Term Provisions
LONG-TERM BORROWINGS
The amount taken by the company as a loan which is repayable after the operating cycle of the company or after twelve months time period then it is classified under long-term borrowings.
Example : long term bank loans, public deposit, bonds, debenture etc.
While getting loans the company has to deposit 'collateral' (security) to the loan providers as a guarantee for the repayment of the loan amount. If the company issues debentures are collateral security then the company has to show it in the 'notes to accounts', here there are two options to show,
a) To pass entry for the issue of debenture as security
JOURNAL ENTRY
Debenture suspense account Dr. XXX
To ____ % Debenture account XXX
( issued debenture as collateral security against loan)
* In notes of accounts it will be shown as entries
b) Entry is not passed for the issue for debenture as collateral
The issue of debenture as security will be shown in the notes of accounts only as an additional information as no entry was passed for it.
DEFERRED TAX LIABILITIES
At the end of the year in order to pay the income tax to the government the company compares its income with the taxable income fixed by the government. If the company's income has crossed the
taxable income then the company has to pay the tax, it becomes a liability for the company. This liability is shown under deferred tax liabilities.
In case the company's income is less than the taxable income then it becomes deferred tax asset. It has to be shown in the asset side of the company's balance sheet. Deferred tax asset has to be adjusted with any previous year's tax balance (if any) then settled accordingly.
LONG TERM LIABILITIES - OTHERS
a) TRADE PAYABLE
The company purchases its goods or avails any kind of services. The amount payable for the goods or services purchased by the company is called trade payable. Trade payable is related to the normal operations of the company not non business transactions.
Example : sundry creditors and bills payable.
b) LONG TERM PROVISION
The term provision means the company keeps a certain amount aside from its profit to meet any future liability. The liability is already known in the case of provisions and the amount kept aside should be used for that specific liability only, not for other purposes.
Example : provision for retirement benefits, gratuity, etc.
b) CURRENT LIABILITIES
These liabilities are expected to be settled within a period of twelve months or the company's operating cycle. The operating cycle of the company differs according to the nature of the company.
a) Short Term Borrowings
b) Other Current Liabilities
c) Short Term Provisions
SHORT-TERM BORROWINGS
The amount borrowed by the company as a loan amount which has to be repaid within the operating cycle of the company or twelve months time period.
TRADE PAYABLE
The amount payable for the purchase of goods or services by the company. Trade payable are the amount payable on normal operations of the business and not of capital nature.
OTHER CURRENT LIABILITIES
- Maturity of long term borrowings
- Interest on borrowings
- Income received in advance / call in advance
- Unpaid dividends
- Application money received but not allotted (it has to be refunded)
- Unpaid mature deposits / debentures / interests
- Outstanding expenses
- Others Example : Gst, Esi, etc.
SHORT TERM PROVISION
The estimate amount set aside to meet any future liability of short term in nature.
Example : Provision for tax, Provision for depreciation etc.
OPERATING CYCLE
Operating cycle means the time taken by the company for processing an asset into cash or its equivalents. The time taken from purchasing of raw materials to converting finished goods into cash is called operating cycle. Operating cycle differs from company to company depending upon the nature of the company.
Purchase of raw material ---- processing ---- finished goods ---- selling ---- receiving cash
Normally operating cycle of the companies is considered as twelve months. Even if some companies have a operating cycle less than twelve months we consider twelve months as normal operating cycle for accounting purpose. If the company has a operating cycle of more than twelve months then the months of operating cycle is considered for the purpose of accounting.
