Class 12 Account Theory note 

Class 12 Account Notes

SBN Online School

Principal of accounting – ll

COMPANY FROMATION



1) Differentiate between the public and private limited company

The difference between public company and private company can be explained on the following basis:

Numbers of members: In a public company, the minimum number of member is 7 whereas the maximum number is not specified. On the other hand, private company can be established by a single person and maximum member is specified.

 Transfer of share: The shareholder of a public company can freely transfer their shares. But shareholder of private company cannot transfer their shares without consent of other shareholders.

Issue of Shares: Public company's share can be issued openly for all people whereas shares are not openly distributed to public in private company.

Use of word 'limited: A public limited company has compulsory to use the word ' limited ‘  to at the end of its name. For example, Nepal Bank Limited. In case of private companies, it is for them to attach ‘private limited as the last word in its name.



2) Mention any three features of the company

The main three features of a company are as follows:

a) Limited liabilities: The shareholder liability is limited to the face   value of the shares that they have purchased.

b) Artificial Legal Person: A company is identified as an artificial person recognized by law. It can hold and deal with any type of property of which it is the owner in any way it likes, can enter into contracts, open bank account in its own name.

c) Transfer of shares: The shareholders of the public limited company can transfer their shares freely without of the consent of the company and others shareholders. But for the transfer of the shares of a private company, permission has been taken from other shareholders.

3) Define Public Limited Company.

A public limited company is one which requires at least 7 members for its incorporation. There is no restriction on issue or transfer of its shares and this type of company can invite the public to purchase its shares and debentures.

4) Memorandum of Association (MOA)

Memorandum of Association (MOA) is the main document of a company. It is the legal document that has to be filed with the registrar of companies at the time of incorporation of the company. It is often called as a memorandum and is comprised of fundamental

conditions on the basis of which a company operates. The memorandum of association shall include the following matters

·  The name of the company,

• The registered address of the company,

·  The objectives of the company,

·  The figure of the authorized capital of the company and the figure of the share capital to be issued by the company for time being and the figure of undertaken to be paid by the promoter of the company,

• Types of shares of the company, the rights, and powers inherent in such shares, the value of each share and number of shares of different types.

·  Number of shares which the promoters have undertaken to subscribe for the time being,

·  Terms of payments of share amounts,

·  Statements that the liability of shareholders shall be limited,

·  The maximum number of shareholders in case of a private company etc.

5) Article of Association (AOA)

Article of Association (AOA) is the document containing all the rules and regulations to run a company. It defines the overall company's purpose. It the document which tells what is the procedure for appointing the board of directors, recording the financial transaction, conducting a general meeting, issuing shares and so on. It is comprised of rules and regulations that govern the company's internal affairs. It includes:

·      Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of shares, share warrant, the surrender of shares, etc.

·      Directors, their qualifications, appointment, remuneration, powers, and proceedings of the board of directors meetings.

·      Voting rights of shareholders, by poll or proxies and proceeding of shareholders general meetings.

·      Dividends and reserves, accounts and audits, borrowing powers and winding up.



6) Prospectus

A company's prospectus is a formal legal document designed to provide information and full details about an investment offering for sale to the public. A public company shall publish its prospectus prior to issuing its securities publicly. It contents:

·  The details of introduction, objectives and management of the   company.

·  Capital Structure of the company

·  Estimated income of the company for at least three years.

·  Condition of issue of share i.e. par, premium or discount and mode and terms of payment. Etc.



7) Define Registered Company.

These are those companies, which are formed by registration under the Company Act. The provision of Company Act, Memorandum of Association and Articles of Association represent the activities of such companies. Private company and public company are the examples of Registered company.



SHARE AND SHARE CAPITAL OF A COMPANY

8) Difference between Equity shares and Preference shares

Below are the two differences between equity shares and preferences shares:

a) Voting Right: Equity shareholders enjoys voting right, but preference shareholders

lacks voting right.

b) Refund of capital: Equity share capital is refunded only after of preference share capital in case of liquidation. Preference shareholders have prior right to refund the capital over equity shareholders.

c) Conversion: Preference shares can be converted into equity shares whereas equity shares are non-convertible.

9) Define Share capital, issued capital and subscribed capital.

Share Capital: The share capital of a company is usually divided into certain numbers of unit of a fixed amount. These units are called shares. A share refers to a fractional part of the capital. So, the individual unit of capital owned by a shareholder is called a share.

Issued capital: It is that part of authorized capital which offered to the public for subscription. The company issues only those numbers of shares, which are sufficient to meet the present financial requirement of the company.

Subscribed capital: It is the share capital actually subscribed by public. It can never exceed the issued capital. The issued share capital, which has not been subscribed by the public, is called under subscription of capital.

10) Authorized Capital

It is a maximum amount of capital that a company can raise as mentioned in the MOA. It is also known as registered or nominal capital. A company can increase its authorized capital by fulfilling necessary legal provisions.

11) Define Preference shares.

Preference share are risk free and return on investment at certain fixed rate is fixed. Preference share are the shares issued by the company which have the right to received specified rate before paid on equity shares. The dividend is pre-determined in case of preference shares.

12) Calls is Arrear and Calls in Advance

Calls in arrears are unpaid amount by shareholders as per call notice of the company till the last date of payment. The company can charge interest in case of Calls in Arrear.

Calls in advance are prepaid amount by shareholders before making call. The company has to pay interest to shareholders as per the provision made in AOA (Article of Association).

13) Re-issue of forfeited share

When a share is forfeited, it is a property of the company. The directors are authorized to re-issue such shares at par, premium or discount. The re-issue amount is debited to bank account and credited to share capital account. The re-issued share at discount should not exceed the forfeited amount.



14) What do you mean by ‘Pro-rata allotment'?

When shares issued is oversubscribed, applicants may be allotted shares in fixed proportion. This is called pro-rata allotment. The proportion depends upon the shares offered and share applied. For example, if company allots 5,000 shares to the applicant of 8,000 shares. It is pro- rata allotment in the proportion of 5:8.



ACCOUNTING FOR DEBENTURES

15) Define Debenture.

Debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. So, a debenture represents a debt. The interest rate is pre-determined. The holders of debenture are called debenture holders. Following are the features of debentures:

Written promises: it contains a promise to repay the principal amount after a certain period. It is a written document of loans issued by a company to its holders. It also contains a promise of periodic payment of interest at a fixed rate.

Certificate: it is issued by a company and is usually in the form of a certificate which is an acknowledgement of a debt.

16) Difference between Shares and Debentures

17) Convertible and Non-Convertible Debentures

Debentures can be classified as Convertible and Non-Convertible Debentures, on the basis of conversion.

 Convertible debentures are a type of debentures that can be converted into equity shares of the company.

Non-convertible debentures are defined as the type of debentures that cannot be converted into equity shares of the company.

FINAL ACCOUNT OF A COMPANY

18) What is Balance Sheet?

A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time.

FINANCIAL STATEMENT ANALYSIS

19) Define Financial Statement

Financial Statements are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand. It mainly includes: a) profit and loss a/c b) balance sheet c) cash flow statement.