Basic Concepts Of Company Accounts

Company Accounts Introduction

Company accounts are an analysis of an organization’s financial activity over a period (12 months). For showing the financial performance of a company, accounts are maintained and they are prepared in corporate accounting. 

It is a recording of the issue of shares, debentures, etc. of the company. Other routine accounts of the company are also recorded. With all these details, every year the company prepares accounts consisting of the Cash Flow Statement, the Profit and Loss Statement, and Balance Sheet. 

Company Accounts- Issue of shares

The issue of shares is a process in which a company allocates new shares to the public. The company issues prospectus, receives applications, and then allocates to the public. Shares are issued either at par or a premium or a discount.  If the shares of a company are issued at a price more than its face value of the shares, the excess amount is called the premium. If the shares are issued at a price less than the face value of the share, it is called as shares issued at a discount. The image below gives a clear idea of the issue of shares.

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Company Accounts- Accounting for Share Capital

A company cannot generate its own capital, which has to be necessarily collected from several persons. The persons who contributed the amount are the shareholders and the amount thus collected is the share capital of the company. The capital amount collected is kept in a “Share Capital Account”.

From the point of accounting, the share capital of the company is classified as (1) Authorized Capital, (2) Issued Capital, (3) Subscribed Capital, (4) Called up Capital, (5) Paid-up Capital,  (6) uncalled capital, and (7) Reserve Capital.

The issue of ordinary shares is accounted for by allocating the proceeds under (1) Share Capital Account and (2) Share Premium Account. All the money received along with the application is deposited with a scheduled bank in a separate account as above opened for the purpose

Company Accounts– Notes

Company accounts are a consolidation of a company’s financial activities for one year. It consists of the Cash Flow Statement, Balance Sheet, and Profit & Loss Account. 

The Cash Flow Statement reveals the movement of cash in and out of the business over the financial year. There are three categories in the cash flow statement. One is Operating activities, which reveals the amount of cash that came from the sales of goods and services less the amount needed to sell goods/ services. The second one is Investing activities, which shows the amount of cash spent on capital expenditure. And, the third one is Financing activities, which shows the amount of cash spent on outside financing. 

The Balance Sheet of a company gives an insight into the assets, liabilities, and shareholders' equity at a specific point of time. It indicates the financial health of the company.

In a Profit & Loss Account, we can see the details of the revenues and expenses of business throughout the financial year. It differs from the balance sheet as it records performance over some time rather than a snapshot.

FAQ (Frequently Asked Questions)

1. What do you mean by Company Issues Shares? Explain its procedures.

Ans. A company issues shares to raise additional capital to fund business operations. The issue of shares by a company is a process in which the company allocates shares to the public. A company, following the rules as per Companies Act 2013, takes appropriate steps before the issue of shares. Following the laid down procedure, they issue Prospectus of the company, receive applications, and then go for allotment of shares. 

The prospectus of a company explains about the company that is issuing. The information would be such as names of the board of directors, their past performance, their terms of issue, and the investment for which the capital is being raised. 

After getting an invitation through the prospectus, the investors can submit their applications in the prescribed form seeking allotment of shares. The process of generating new shares is termed as allocation or allotment. On allotment, the company issues the shares and the persons who invested become the shareholders. 

The shares issued are now called the authorized shares that are sold to and held by the shareholders of a company, regardless of whether they are insiders, institutional investors, or the general public, as shown in the company's annual report.  A company can issue a share only once. After this, it is sold by the investors to another.

2. What is a Company Account? Brief about the basic concepts of a Company Account.

Ans. A company maintains the accounts for showing its financial performance. The accounts are made in corporate accounting. It records the issue of equity and preference shares, debentures, etc. It also maintains all routine transactions, which include purchases, sales, receipts, and payments. These company accounts are helpful for making the company’s final account.  

A company account is a summary of its financial activity conducted over 12 months. The annual company account consists of the Balance Sheet, Profit & Loss Account, and the Cash Flow Statement. The balance sheet is a financial statement giving an insight into the company’s business assets, liabilities, and equity at a specific point of time. 

The profit & loss account shows the total income/ revenue and total expenses of the business throughout the financial year. Speaking of the cash flow statement, it reveals the cash movements in and out of the business over the financial year.