“Company Accounts Notes – B.Com/BBA (NEP 2020) Semester 2/3 With Journal Entries, DU-BHU-AU-BBAU

                                                   

                                 

 “Welcome B.Com/BBA students! These company accounts notes, aligned with NEP 2020, cover share capital, forfeiture, buyback, and preference share redemption, complete with journal entries and practical examples—perfect for exam prep and quick revision.”

            Overview--

•    Share Capital-- Meaning and types, Accounting Treatment.
•    Forfeiture of Shares and re-issue and right issues of shares
•    Buyback of equity shares
•    Redemption of preference shares

SHARE CAPITAL---

   Definition-- 

Share Capital is the total amount of money a company raises by issuing shares to its shareholders. It represents the funds contributed by the shareholders in exchange for ownership in the company.                                                                                                                                                                                    It refers to the capital raised by a company through the issue of shares. It is a part of the company’s total capital and is shown on the liability side of the balance sheet under 'Shareholder’s Funds'."

Types of Shares: --

1.  Equity Shares

These are the most commonly issued shares and represent ownership with full voting rights. Equity shareholders are considered real owners of the company.

• Voting rights on company matters.

• Eligible to receive dividends after preference shareholders

• Face higher risk in case of business loss

• Get residual profits and assets in case of liquidation

2. Preference Shares

These shares give preferential rights in terms of:

• Receiving fixed dividends before equity shareholders

• Capital repayment at liquidation before equity shareholders

• No voting rights (except in special cases like non-payment of dividend)

• Carry fixed dividend and are paid before equity shareholders.

Types of Preference Shares:

1. Cumulative Preference Shares
2. Non-Cumulative Preference Shares
3. Convertible Preference Shares
4. Non-Convertible Preference Shares
5. Redeemable Preference Shares
6. Irredeemable Preference Shares

Accounting Treatment of Shares

Buyback of Shares

• A buy-back of shares means a purchase by a company of its own shares or specified securities. A company may resort to buy-back for a variety of reasons, e.g., excess floating stock in the market, poor performance of the share, utilization of excess cash with the company, etc.   
• Many times, a company has excess cash on its balance sheet which it wants to distribute amongst its shareholders. A buyback is one of the modes by which it can achieve its objectives.
• The company can buy-back equity as well as preference shares. the shares bought back cannot be used for treasury operations and they must be compulsorily extinguished and destroyed.
• The buy-back of shares can be made only out of: (a) Free Reserves (means reserves as per the last audited Balance Sheet which are available for distribution and share premium but not the share application amount) (b) Share Premium Account (c) Proceeds of any Securities However, Buyback cannot be made out of proceeds of an earlier issue of the same kind of securities.
• Terms and conditions of buyback of shares are mentioned in Sec 68(2) of Comapanies Act,2013.

Redemption of Preference Shares

• Redemption of preference shares is a process where a company buys back its issued preference shares from shareholders. This usually happens on a predetermined date and often at a pre-agreed price.
• Companies use redemption as a financial strategy to adjust their equity structure or to return surplus cash to shareholders, particularly for preference shares with a fixed redemption period.  

Conditions as per Companies Act, 2013

1.  Only fully paid-up preference shares can be redeemed.

2.  Redemption must be done:

   • Out of profits available for dividend (Free Reserves), or

   • From proceeds of a fresh issue of shares

3.  A sum equal to nominal value of shares redeemed (if from profits) must be transferred to Capital Redemption Reserve (CRR)

4.  Shares cannot be redeemed at a premium unless premium is paid out of Securities Premium A/c

Methods of Redemption of Preference Shares

1.  Out of profits/ dividend — Companies often create a separate fund, the Capital Redemption Reserve, by setting aside profits. This reserve is then used to redeem preference shares.                                                                                                                         It's a prudent method, ensuring the company uses its earnings without depleting its working capital.
2. Proceeds for issue of new shares — A company might issue new shares, either standard or preference, to raise funds specifically for redeeming the existing preference shares. This method is like replacing old shares with new ones, maintaining the company’s equity capital while managing its share structure.
3. Combination of both of the methods.

            

🙅 Hey bud!!! Want detailed entries for redemption of preference shares and Buyback of Shares???  Comment below😉