7. Prepare Company Statements

Companies are separate legal entities, and their accounting involves share capital, reserves, provisions, and taxation. Preparing company statements requires following the Companies Act, organizational policies, and accounting standards.

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7.1 Types of Share Capital (as per Companies Act)

Share capital represents funds raised by the company from shareholders in exchange for ownership (shares). Types include:

1. Ordinary/Equity Shares

   • Most common; shareholders get dividends and voting rights.

2. Preference Shares

   • Fixed dividend; priority over ordinary shares during profit distribution and liquidation; usually no voting rights.

3. Issued, Authorized, and Paid-Up Capital

   • Authorized: Maximum capital company can issue.

   • Issued: Shares actually issued to shareholders.

   • Paid-Up: Amount shareholders have paid.

Accounting Entry for Share Issue:

• Dr Cash/Bank

• Cr Share Capital (Ordinary/Preference)

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7.2 Types of Reserves (as per Organizational Objectives)

Reserves are retained earnings set aside for specific purposes:

1. Revenue Reserves – Created from profits for business operations (e.g., general reserve).

2. Capital Reserves – Arises from non-operating activities (e.g., sale of fixed assets above book value).

3. Statutory Reserves – Required by law for specific purposes.

Accounting Entry for Appropriation to Reserve:

• Dr Profit & Loss Account

• Cr Reserves Account

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7.3 Issue of Shares (as per Organizational Requirements)

• Shares can be issued to raise capital for expansion.

• Steps:

  1. Board resolution authorizing share issue

  2. Determine number of shares, nominal value, and premium

  3. Record application money, allotment, and call money

Accounting Entries:

1. Application money received:

   • Dr Cash/Bank

   • Cr Share Application Account

2. On allotment:

   • Dr Share Application

   • Cr Share Capital

3. On call money received:

   • Dr Cash/Bank

   • Cr Share Capital

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7.4 Rights Issues and Bonus Shares (Company Policies)

• Rights Issue: Existing shareholders offered additional shares at a discount.

  • Example: 1 new share for every 5 held.

• Bonus Shares: Issued from reserves to reward shareholders.

Accounting Entries:

• Rights issue: same as ordinary share issue.

• Bonus issue:

  • Dr Reserves

  • Cr Share Capital

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7.5 Provisions and Reserves

Provisions:

• Amount set aside for known liabilities of uncertain amounts (e.g., bad debts, depreciation).

• Accounting Entry:

  • Dr Expense

  • Cr Provision Account

Reserves:

• Retained earnings set aside for future use or expansion.

Difference: Provisions = for liabilities; Reserves = for general purposes.

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7.6 Income Tax Calculation (as per SOPs)

• Companies calculate tax on taxable profit.

• Accounting treatment:

  • Dr Income Tax Expense (P&L)

  • Cr Income Tax Payable (Liability)

Adjust for deferred tax if applicable, following SOPs and accounting standards.

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7.7 Accounting Treatment and Presentation

1. Statement of Profit or Loss (Income Statement)

   • Revenue – Expenses = Net Profit

2. Statement of Financial Position (Balance Sheet)

   • Assets = Liabilities + Equity (Share Capital + Reserves)

3. Presentation Guidelines:

   • Separate equity, reserves, and liabilities clearly.

   • Follow International Financial Reporting Standards (IFRS) or local accounting standards.

   • Disclose share capital, reserves, provisions, and taxation in notes to accounts.

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