Lecture Notes Company accounts and Auditing practices

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STUDY MATERIAL EXECUTIVE PROGRAMME COMPANY ACCOUNTS AND AUDITING PRACTICES MODULE II PAPER 5 ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003 tel 011-4534 1000, 4150 4444 fax +91-11-2462 6727 email infoicsi.edu website www.icsi.edu iEXECUTIVE PROGRAMME COMPANY ACCOUNTS AND AUDITING PRACTICES Finance and accounting have assumed much importance in todays competitive world of business wherein corporate organisations have to show the true and fair view of their financial position. Thus, the application of accounting in the business sector has become an indispensable factor. Company Secretary has to provide the complete and accurate information about the financial operations of the company to management for decision making. This emphasizes that the books of account are to be maintained accurately, up-to-date and as per the norms. The subject Company Accounts and Auditing Practices is very important for the students. In the course of his work, a Company Secretary is expected to have the working knowledge of Company Accounts. He should also have the working knowledge of auditing concepts such as verification, vouching, and internal control. This will help a company secretary in carrying out his duties in a more professionalized manner. The entire paper has been discussed in fifteen study lessons. In starting nine study lessons we have discussed about the Share Capital, Debentures, Final Accounts of Companies, Corporate Restructuring, Consolidation of Accounts, Valuation of Shares and Intangible Assets, Liquidation of Company, Corporate Financial Reporting and Accounting Standards. At last six lessons, we have discussed about Auditing Concepts, types of Company Audit, Internal Control and its Review, Audit engagement and documentation. In this study every efforts has been made to give a comprehensive coverage of all the topics relevant to the subject. In all study lessons the requisite theoretical framework for understanding the practical problems in the subject has been explained and wherever necessary practical illustrations have been given to facilitate better understanding. At the end of each study lesson a brief about the lesson have been given under the caption Lesson Round Up as well a good blend of theoretical and practical questions have been given under the caption Self Test Questions for the practice of students to test their knowledge. In fact, this being a practical paper, students need to have good theoretical knowledge and practice to attain the requisite proficiency and confidence. This study material has been published to aid the students in preparing for the Company Accounts and Auditing Practices paper of the CS Executive Programme. It is part of the education kit and takes the students step by step through each phase of preparation stressing key concepts, pointers and procedures. Company Secretaryship being a professional course, the examination standards are set very high, with emphasis on knowledge of concepts, applications, procedures and case laws, for which sole reliance on the contents of this study material may not be enough. Therefore, in order to supplement the information/contents given in the study material, students are advised to refer to the Suggested Readings mentioned in the study material, Student Company Secretary e-bulletin, Business Dailies and Journals. In the event of any doubt, students may write to the Directorate of Academics the Institute for clarification at academicsicsi.edu. Although due care has been taken in publishing this study material yet the possibility of errors, omissions and/ or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf. Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the same are brought to its notice for issue of corrigendum in the Student Company Secretary e-bulletin. This study material is based on those sections of the Companies Act, 2013 and the rules made there under which have been notified by the Government of India and came into force w.e.f. April 01, 2014 ( Including amendments / clarifications / circulars issued there under upto June, 2014). In respect of sections of the Companies Act, 2013 which have not been notified, applicable sections of Companies Act, 1956 have been dealt with in the Study Material. iii5. Consolidation of Accounts  Holding and Subsidiary Companies - Accounting Treatment, Disclosures and Consolidation of Accounts 6. Valuation of Shares and Intangible Assets  Valuation of Shares, Methods of Valuation, Price Earning Multiple Valuation, Discounted Cash Flow ( DCF) Method  Valuation of Intangibles: Brand, Goodwill and IPRs 7. Liquidation of Company  Preparation of Statement of Affairs including Deficiency /Surplus Account 8. Corporate Financial Reporting  Various Requirements of Corporate Reporting  Value Added Statements: Economic Value Added (EVA) , Market Value Added, Shareholders Value Added 9. Accounting Standards  Relevance and Significance  National and International Accounting Standards and Authorities  Adoption, Convergence and Interpretation of International Financial Reporting Standards ( IFRS) and Accounting Standards in India PART B: AUDITING PRACTICES ( 30 MARKS) 10. Auditing Concepts  Nature, Scope and Significance of Auditing  Basic Principles Governing an Audit  Overview of Auditing and Assurance Standards- National and International 11. Types of Company Audit  Statutory Audit  Internal Audit  Branch Audit  Joint Audit  Special Audit  CAG Audit 12. Internal Audit  Forms of Audit - Propriety Audit, Compliance Audit and Efficiency Audit  Nature, Scope and Techniques of Internal Audit; Functions and Responsibilities of Internal Auditors; Organisational Status of Internal Auditing Function, Internal Audit vis-à-vis Statutory Audit vCONTENTS PART A: COMPANY ACCOUNTS (70 MARKS) LESSON 1 SHARE CAPITAL Kinds of share capital 2 Issue of Shares 3 Issue of Shares at Par 3 Issue of Shares at Premium 6 Issue of Shares at Discount 7 Under-Subscription of Shares 7 Over-Subscription of Shares 7 Forfeiture of Shares 10 Re-issue of Forfeited Shares 12 Forfeiture and Re-issue of Shares Allotted on Pro-rata Basis in Case of Over-subscription 13 Buy-Back of Shares 13 Issue of Bonus Shares 18 Employee Stock Option Scheme 20 Issue of Sweat equity shares 22 Right Shares 23 Issue and redemption of Preference shares 40 Capital Redemption Reserve Account 40 Underwriting of shares 56 Underwriting Commission 56 Marked and Unmarked Applications 57 Determining the Liability of Underwriters 57 Accounting Treatment relating to Underwriting of Shares or Debentures 59 Lesson Round-up 67 Self-test Questions 68 LESSON 2 DEBENTURES Introduction 74 Issue of Debentures 74 ixPage Debentures Issued for Cash 74 Issue of Debentures at Par 74 Issue of Debentures at Premium 77 Issue of Debentures at Discount 79 Debentures Issued for Consideration other than Cash 81 Debentures Issued as Collateral Security 82 Terms of Issue of Debentures 84 Interest on Debentures 86 Writing off the Discount on Issue of Debentures 89 Loss on Issue of Debentures 92 Redemption of Debentures 96 Mobilisation of Funds for Redemption of Debentures 97 Methods of Redemption of Debentures 98 Redemption of Debentures Out of Profit 99 Redemption out of the Proceeds of Fresh Issue of Shares or Debentures 116 Redemption out of Sale Proceeds of Assets of the Company 116 Conversion of Debentures into Shares 148 Lesson Round Up 154 Self test Questions 154 LESSON 3 FINAL ACCOUNTS OF COMPANIES Introduction 158 Preparation and presentation of financial statements 158 Schedule III of the Companies Act, 2013 159 General Instructions for the preparation of balance sheet and profit and loss account 160 Presentation of Balance Sheet 161 Key features of Balance Sheet 161 Key features Statement of Profit and Loss 162 General Instructions for preparing the balance sheet of a company 163 General Instructions for Preparation of Statement of Profit And Loss 173 True and fair view of financial statements 175 xPage Treatment of special items under companies Act 2013 176 Managerial Remuneration 176 PART II of Schedule V 178 Calculation of net profits for determining managerial remuneration 179 Declaration of Dividend 180 Provision for Depreciation 182 Methods to Ascertain Profit or Loss Prior to Incorporation 198 Basis of Apportionment of Expenses 198 Preliminary Expenses 205 Lesson Round-Up 206 Self-test Questions 206 LESSON 4 CORPORATE RESTRUCTURING Meaning of Corporate Restructuring 210 Need and Scope of Corporate Restructuring 210 Some Examples of Corporate Restructuring 211 Why Corporate Structuring Exercise is carried out ? 211 Kinds of Restructuring 211 Amalgamation of Companies 212 Types of Amalgamation 212 Consideration 214 Accounting for Amalgamations 215 Acquisition of Business 239 Important Points to be noted in Connection with Acquisition of a Business 239 Meaning of Internal Reconstruction 247 Significance of internal reconstruction 247 Methods of internal reconstruction 247 Alteration of share capital as per section 94, 95 and 97 of the Companies Act, 1956 248 Variation of Shareholders rights 249 Reduction of Share Capital as per Section 100 to 105 of the Companies Act, 1956 250 Compromise/ Arrangements 252 xiPage Surrender of Shares 252 Lesson Round up 272 Self-test Questions 273 LESSON 5 CONSOLIDATION OF ACCOUNTS Meaning and definition of holding and subsidiary company 280 Preparation of Consolidated Financial Statements as per the Companies Act 280 Schedule III of the Companies Act, 2013 281 Preparation of Consolidated Balance Sheet 282 Investment in Shares of Subsidiary Company 282 Minority Interest 285 Pre-acquisition Profits and Reserves of Subsidiary Company 287 Pre-acquisition Losses of Subsidiary Company 288 Profit on Revaluation of Assets of Subsidiary Company 288 Loss on Revaluation of Assets of Subsidiary Company 288 Goodwill or Cost Control 288 Post-acquisition Profits or Losses 291 Inter-company Unrealised Profits included in Unsold Goods 291 Inter-company Transactions 291 Contingent Liabilities 292 Preference Shares in Subsidiary Company 296 Bonus Shares 296 Treatment of Dividend 296 Holding Company Consisting of more than one Subsidiary 297 Preparation of Consolidated Profit and Loss Statement 302 Lesson Round-up 305 Self-test Questions 306 LESSON 6 VALUATION OF SHARES AND INTANGIBLE ASSETS I. Valuation of Shares 312 Determination of Normal Rate of Return and Capitalisation Factor 315 xiiPage Fair Value of Shares 316 Special Factors for Valuation of Shares 316 Valuation of Preference Shares 318 II. Valuation of Intangible Assets 333 Intangible Assets 333 Approaches for Valuing Intangible Assets 334 Recognition and Initial Measurement of an Intangible Asset 335 Separate Acquisition of Intangible Assets 335 Acquisition of Intangible Assets as Part of an Amalgamation 335 Acquisition of Intangible Assets by way of a Government Grant 336 Internally Generated goodwill 336 Cost of an Internally Generated Intangible Asset 337 Recognition of an Expense on Intangible Asset 338 Recoverability of the Carrying Amount  Impairment Losses 339 Retirements and Disposals on Intangible Assets 340 Valuation of Goodwill 340 Need for Valuation of Goodwill 340 Factors Affecting Goodwill 341 Determination of future maintainable profit 342 Methods of Valuing Goodwill 346 Summary of Valuation of Goodwill 352 Lesson Round-up 353 Self-test Questions 354 LESSON 7 LIQUIDATION OF COMPANY Meaning of Liquidation of a Company 362 Consequences of Winding up 362 Contributory 362 Fraudulent Preference 363 Preparation of the Statement of Affairs 364 Statement of Affairs and Lists to be Annexed 365 xiiiPage B-List Contributories 373 Lessons Round-up 374 Self Test Questions 375 LESSON 8 CORPORATE FINANCIAL REPORTING Introduction 380 Concept of Corporate Financial Reporting 380 Various Requirements of Corporate Reporting in India 380 Directors Report 381 Disclosure of Significant Accounting Policies 381 Disclosure of Notes on Accounts 382 Development in Corporate Financial Reporting 382 Characteristics of Corporate Financial Reporting 382 Economic Value Added 388 Market Value Added 391 Shareholder Value Added (SVA) 391 Lesson Round up 392 Self test Questions 393 LESSON 9 ACCOUNTING STANDARDS Introduction 396 Meaning of Accounting Standards 396 Objective of Accounting Standards 396 Formation of the Accounting Standards Board 396 Objectives and Functions of the Accounting Standards Board 397 Scope of Accounting Standards 398 Compliance with the Accounting Standards 399 Applicability of Accounting Standards under Companies Act 2013 399 Accounting Standards issued 400 AS-1  Disclosure of Accounting Policies 401 AS-2  Valuation of Inventories 401 xivPage AS-3  Cash Flow Statements 402 AS- 4  Contingencies and Events Occurring after the Balance Sheet Date 403 AS-5  Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies 403 AS-6  Depreciation Accounting 404 AS-7  Construction Contracts 404 AS-8  Accounting for Research and Development 406 AS-9  Revenue Recognition 406 AS-10  Accounting for Fixed Assets 406 AS-11  The Effects of Changes in Foreign Exchange Rates 407 AS-12  Accounting for Government Grants 407 AS-13  Accounting for Investments 408 AS-14  Accounting for Amalgamations 408 AS-15  Employee Benefits 409 AS-16  Borrowing Cost 409 AS-17  Segment Reporting 410 AS-18  Related Party Disclosures 411 AS-19  Leases 411 AS-20  Earnings Per Share 412 AS-21  Consolidated Financial Statements 413 AS-22  Accounting for Taxes on Income 414 AS-23  Accounting for Investments in Associates in Consolidated Financial Statements 415 AS-24  Discontinuing Operations 416 AS-25  Interim Financial Reporting 416 AS-26  Intangible Assets 418 AS- 27  Financial Reporting of Interests in Joint Ventures 419 AS-28  Impairment of Assets 421 AS-29  Provisions, Contingent Liabilities and Contingent Assets 423 AS 30, 31, & 32  Financial Instruments 424 Recognition and derecognition 426 International Accounting Standards (IAS) / International Financial Reporting Standards ( IFRS) 428 IAS-1  Presentation of Financial Statements 430 IAS-2  Inventories 430 IAS-7  Cash Flow Statements 431 xvPage IAS-8  Accounting Policies, Changes in Accounting Estimates and Errors 431 IAS-10  Events After the Balance Sheet Date 431 IAS-11  Construction Contracts 431 IAS-12  Income Taxes 431 IAS-14  Segment Reporting 432 IAS-16  Property, Plant and Equipment 432 IAS-17  Leases 432 IAS-18  Revenue 432 IAS-19  Employee Benefits 433 IAS-20  Accounting for Government Grants and Disclosure of Government Assistance 433 IAS-21  The Effects of Changes in Foreign Exchange Rates 433 IAS-23  Borrowing Costs 433 IAS-24  Related Party Disclosures 433 IAS-26  Accounting and Reporting by Retirement Benefit Plans 434 IAS-27  Consolidated and Separate Financial Statements 434 IAS-28  Investments in Associates 434 IAS-29  Financial Reporting in Hyperinflationary Economies 434 IAS-31  Interests in Joint Ventures 434 IAS-33  Earnings Per Share 435 IAS-34  Interim Financial Reporting 435 IAS-36  Impairment of Assets 435 IAS-37  Provisions, Contingent Liabilities and Contingent Assets 435 IAS-38  Intangible Assets 436 IAS-39  Financial Instruments: Recognition and Measurement 436 IAS-40  Investment Property 436 IAS-41  Agriculture 437 IFRS-1  Firsttime Adoption of International Financial Reporting Standards 437 IFRS-2  Share-based Payment 437 IFRS-3  Business Combinations 438 IFRS-4  Insurance Contracts 438 IFRS-5  Non-current Assets held for Sale and Discontinued Operations 438 IFRS-6  Exploration for and Evaluation and Mineral resources 438 IFRS-7  Financial Instruments: Disclosures 438 xviPage IFRS-8  Operating Segments 439 IFRS-9  Financial Instruments 439 Convergence of Indian Accounting Standards with International Financial Reporting Standards ( IFRS) 439 Lesson Round-up 441 Self-test Questions 441 LESSON 10 AUDITING CONCEPTS Evolution of Auditing 444 Definitions of Auditing 444 Features of Auditing 445 Objectives of Auditing 445 Scope of Auditing 446 Basic principles governing an audit 446 True and Fair View 447 Advantages of an Independent Audit 448 Investigation 449 Scope of investigation 449 Reasons for carrying out investigation 449 Audit and Investigation distinguished 449 Materiality in Auditing 450 Auditing Standard 450 Procedure of issuing auditing standards 451 International Auditing Standards 451 Harmonization of Indian Auditing standards with International Auditing Standards 451 Brief Overview of Auditing Standards in India 451 Standards on Quality Control ( SQCs) 451 Elements of System of Quality Control 451 Standards for Audits and Reviews of Historical Financial Information 452 SA 210: Agreeing the Terms of Audit Engagements 453 SA 220: Quality Control for an Audit of Financial Statements 453 SA 230: Audit Documentations 453 xviiPage SA 240: the Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements 454 SA 250: Consideration of Laws and Regulations in an Audit of Financial Statements 454 SA 260: Communication with those Charged with Governance 455 SA 265: Communicating Deficiencies in Internal Control to those Charged with Governance 455 and Management SA 299: Responsibility of Joint Auditors 455 SA 300 (Revised): Planning an Audit of Financial Statements 455 SA 315: Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment 456 SA 320: Materiality in Planning and Performing an Audit 456 SA 330: the Auditors Responses to Assessed Risks 456 SA 402: Materiality in Planning and Performing an Audit 456 SA 450: Evaluation of Misstatements Identified During the Audit 456 SA 500: Audit Evidence 456 SA 501: Audit Evidence  Specific Considerations for Selected Items 457 SA 505: External Confirmations 457 SA 510: Initial Audit Engagements  Opening Balances 457 SA 520: Analytical Procedures 457 SA 530: Audit Sampling 457 SA 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and 457 Related Disclosures SA 550: Related Parties 457 SA 560: Subsequent Events 458 SA 570 Going Concern 458 SA 580: Written Representations 458 SA 600: Using the Work of another Auditor 458 SA 610: Using the work of Internal Auditors: 458 SA 620: Using the Work of an Auditors Expert 458 SA 700: Forming an Opinion and Reporting on Financial Statements 459 SA 705: Modifications to the Opinion in the Independent Auditors Report 459 SA 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent 459 Auditors Report SA 710: Comparative Information 459 SA 800: Special Considerations  Audits of Financial Statements Prepared in Accordance with 460 Special Purpose Frameworks xviiiPage SA 805: Special Considerations  Audits of Single Financial Statements and Specific Elements, 460 Accounts or Items of a Financial Statement SA 810: Engagements to Report on Summary Financial Statements 460 Lesson Round-up 460 Self-test Questions 461 LESSON 11 TYPES OF COMPANY AUDIT Audit of companies under the Companies Act 2013 464 Statutory Audit 464 Appointment of Auditors 464 Manner and procedure of selection and appointment of auditors 464 Conditions for appointment and notice to Registrar 465 Mandatory Rotation of Auditors 465 Manner of rotation of auditors by the companies on expiry of their term 466 Appointment of first auditor: 467 Filling of casual vacancy 467 Internal Audit 474 Secretarial Audit 475 Cost Audit 475 Joint Audit 476 CAG Audit 478 Audit of Government Companies (Commercial Audit) 478 Nature of Audit 479 Regularity Audit (Compliance) 479 Regularity Audit ( Financial) 479 Performance Audit 479 Action on Audit Reports 479 Public Accounts Committee 479 Constitution of the Committee 479 Committee on Public Undertakings 480 CAGs Role in functioning of financial committees of Parliament 480 Lesson Round up 481 Self-test Questions 481 xixLesson 1 Share Capital 1 Lesson 1 Share Capital LESSON OUTLINE L LEA EAR RN NIN ING G O OB BJEC JECT TIVES IVES PART I The most striking feature of a company is its  Meaning of shares ownership structure. The capital in a company is  Meaning and kinds of Share Capital divided into small shares of fixed value. The shares of a company may be equity shares or  Issue of Shares preference shares. The objective of this lesson  Under subscription and over subscription is to make students aware about accounting of of shares different aspects of share capital. After studying  Forfeiture of Shares this lesson one should be able to:  Re-issue of Forfeited Shares  Understand the share capital structure in the balance sheet of a company.  Buy-Back of Shares  Discuss the methods and accounting  Issue of Bonus Shares procedure of issue of shares.  Employee Stock Option Scheme  Specify the accounting treatment when  Issue of Sweat equity shares shares are issued at par, premium and at discount.  Right Shares  Explain the meaning and accounting  Illustrations treatment of forfeiture of shares and reissue PART II thereof.  Issue and Redemption of Preference  Understand the accounting procedure of Shares buy-back of shares.  Illustrations  Enumerate the steps for redemption of preference shares. PART III  Appreciate the purpose of issuing right  Underwriting of shares shares & Bonus shares.  Types of Underwriting  Understand the accounting treatment for  Underwriting Commission ESOPs, ESPS, Sweat Equity Shares.  Payment of Underwriting Commission  Understand the meaning of underwriting.  Marked and Unmarked Applications  Familiarize with various types of underwriting.  Accounting Treatment Determining the Liability of Underwriters  Distinguish between marked application and unmarked applications.  Illustrations  Determine the liability of underwriters.  Lesson Round-up  Self-test Questions Shares of a company are not only issued on the face value. In cases, where the company prospectus is good, or the company has got high reserve, the shares may be sold at premium. Even the shares of a company may be issued at discount as well. 12 EP-CA&AP MEANING OF SHARES A share is one unit into which the total share capital is divided. Each share forms a unit of ownership and is offered for sale so as to raise capital for the company. The shares any member in a company are movable property transferable in the manner provided by the articles of the company. Face value of a share is the par value of the share. It is also known as the Nominal value or denomination of a share. According to Section 2(84) of the Companies Act 2013, share means a share in the share capital of a company and includes stock. Thus, in other words, shares are divisions of the share capital of a company. A share represents a fractional part of the share capital of the company. For example, if a company has a share capital of Rs. 5,00,000 divided into 50,000 shares of Rs.10 each and a person who has taken 50 shares of the company is said to have a share of Rs. 500 in the share capital of the company. Meaning of share capital When total capital of a company is divided into shares, then it is called share capital. A joint stock company raises its capital by issue of shares to finance its activities. The Memorandum of Association of the company states the amount of capital with which the company is desired to be registered and the number of shares into which it is to be divided. It constitutes the basis of the capital structure of a company. Kinds of share capital The share capital of a company limited by shares shall be of two kinds under the Companies Act 2013, namely:  (a) Equity share capital : Equity share capital with reference to any company limited by shares means all share capital which is not preference share capital. Equity share capital can be i) with voting rights; or ii) with differential rights as to dividend or voting or any other right. ( b) Preference share capital : Preference share capital with reference to any company limited by shares means that part of the issued share capital of the company which carries or would carry a preferential right with respect to   payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and  repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. Deemed preference share capital: The capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:   that in respect of dividends, in addition to the preferential rights to the payment of dividend, it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;  that in respect of capital, in addition to the preferential right to the repayment, on a winding up, it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.Lesson 1 Share Capital 3 Issue of Shares When a public company desires to raise capital by issuing its shares to the public, it has to invite the public to subscribe for its shares. The person who intends to subscribe to those shares should make an application for the desired number of shares to the company. Then, the company will allot shares to the applicant. Allotment means the appropriation of a certain number of shares to an applicant in response to his application. The company cannot allot more than the number of shares offered to the public for subscription through the prospectus. Moreover, the company cannot make allotment unless the amount stated in the prospectus as the minimum subscription has been subscribed and the sum payable on application for the stated amount has been received by the company. If the number of shares applied for is less than the number of shares offered, the allotment can be only for the shares applied for provided minimum subscription is raised. ISSUE OF SHARES FOR CASH AT A AT PAR PREMIUM FOR CONSIDERATION OTHER THAN CASH ISSUE OF SHARES AT PAR Shares are said to be issued at par when the issue price is equal to the face value or nominal value of the shares i.e. issue price is Rs. 10 and face value is also Rs. 10. When the shares are issued, the company may ask the payment of the shares either payable in one lump sum or in installments. ( a) When shares are issued at par and are payable in full in a lump sum: (1) On receipt of application money  Bank Dr. (With the amount received on application) To Share Application and Allotment A/c ( 2) On allotment of shares - Share Application and Allotment A/c Dr. ( With the money received on the number of To Share Capital A/c shares allotted) Note: ( i) When the capital of the company consists of shares of different classes, a separate share application account will be opened for each class of shares, i.e. equity shares application account/preference share application account etc. (ii) Unless shares are allotted by the company, the receipt of application is simply an offer and cannot be credited to Share Capital Account.4 EP-CA&AP ( iii) If the company fails to raise the minimum subscription, then no shares can be allotted and the application money has to be returned to the applicants. For this, the entry will be as follows: Share Application and Allotment A/c Dr. ( With the application money received now To Bank refunded) (iv) In actual practice, the cash transactions are not journalised but the same have to be entered in the cash book. The entry in the Cash Book will be as follows: Cash Book ( Bank Columns) Dr. Cr. Particulars Rs. Particulars Rs. To Share Application and XXX By Share Application and XXX Allotment A/c Allotment A/c (Application money on..... shares ( Refund of application money on......... Rs....................per share) shares Rs......... per share) ( b) When shares are issued at par and the amount is payable in installments: When shares are not payable in a lump sum, they can be called in a number of installments. After allotment, whenever the need arises, the directors may demand further money from the shareholders towards payment of the value of shares taken up by them. Such demands are termed as calls. The different calls are distinguished from each other by their serial numbers, i.e. first call, second call, third call and so on. The last installment is also termed the final call along with the number of the last call.  First installment is called application money  Second installment is called allotment money  Third installment is called first call money and  The last installment is called final call money. JOURNAL ENTRIES ( i) On receipt of application money Bank Dr. with the amount received on application To Share Application Account (Being the application money received in respect of...... shares Rs..........per share) ( ii) On allotment of shares Share Application Account Dr. with the amount of application money on allotted To Share Capital Account shares (Being the application money on allotted shares now transferred to share capital account) Lesson 1 Share Capital 5 ( iii) On refund of application money on rejected applications Share Application Account Dr. with the amount actually repaid To Bank ( Being application money on ____ shares refunded) ( iv ) On making the allotment money ( second installment) due Share Allotment Account Dr. with the amount due on allotment To Share Capital Account (Being the allotment money due in respect of allotment of........ shares Rs........ each) ( v ) On receipt of allotment money is received the following journal entry is made Bank Dr. with the actual amount received as allotment money To Share Allotment Account ( Being the amount received on.......shares Rs......... each) ( v i) On making the first call Share First Call Account Dr. with the amount due on first call To Share Capital Account (Being the amount due on first call Rs...... per share on......shares) (v ii) On receipt of first call money Bank Dr. with the amount received on first call To Share First Call Account ( Being the amount received in respect of first call Rs...... per share on......shares) ( viii) When second call is made Share Second Call Account Dr. with the amount due on second call To Share Capital Account ( Being the amount due on second call Rs..... per share on.... shares) (ix) On receipt of second call money: Bank Dr. With the amount actually received on second call To Share Second Call Account ( Being the amount received in respect of second call Rs........ per share on ........... shares) 6 EP-CA&AP ( x) When the final call is made: Share Final Call Account Dr. with the amount due on final call To Share Capital Account ( Being the amount due on final call Rs................. per share on........shares) ( xi) On receipt of final call money: Bank Dr. with the amount actually received on final call To Share Final Call Account ( Being the amount received in respect of final call Rs................. per share on.................. shares) ISSUE OF SHARES AT PREMIUM The shares of many successful companies which offer attractive rates of dividend on their existing capitals fetch a higher price than their face value in the market. When shares are issued at a price higher than the face value, they are said to be issued at a premium. Thus, the excess of issue price over the face value is the amount of premium. For example, if a share of` 10 is issued at` 12,` (12  10) =` 2 is the premium. The premium on issue of shares must not be treated as revenue profits. On the contrary, it must be regarded as capital receipt. The Companies Act requires that when a company issues shares at a premium whether for cash or otherwise, a sum equal to the aggregate amount of the premium collected on shares must be credited to a separate account called Securities Premium Account. There are no restrictions in the Companies Act on the issue of shares at a premium, but there are restrictions on its disposal. Under Section 52(2) of the Companies Act 2013, the Securities Premium Account may be applied by the company  ( a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares; ( b) in writing off the preliminary expenses of the company; ( c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; ( d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or ( e) for the purchase of its own shares or other securities under section 68. It is to be noted here that utilization of the amount of Securities Premium Account except in any of the modes specified above, will attract the provisions relating to the reduction of share capital of a company under the section 66 of the Companies Act 2013. The Securities Premium Account must be shown as Securities premium reserves separately in the liabilities side of the balance sheet under the head Reserves & Surplus. The premium is usually payable with the installment due on allotment. However, some companies may charge premium with share application money or partly with share application money and partly at the time of allotment of shares. It may be included in call money also.

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