Introduction to Company Accounts

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A company is a voluntary business organization that is legally recognized and exists as a separate entity. It is considered an artificial individual with its unique signature or seal. For investors planning to venture their money and services into a certain corporation, a proper analysis of company accounts is crucial before putting their assets at stake. It includes proper studying of the company’s balance sheets, profit-loss statements, cash flow statements and various other documents that give a basic idea about the status of the company in question. This blog will help you comprehend the basics of company accounts introduction and thereby establish a strong foundation of the concept. 

Important Features of a Company

Before getting to the management of the company accounts, we must first understand what a company is. The following are the important features defining a company:

  1. Legal Incorporation - For the establishment of a company as a separate legal entity, it should be incorporated under the Companies Act 1956 or, the Companies Act 2013. These acts lay down the responsibilities of companies and their members, along with the guidelines for certain procedures concerning the company’s activity.

  1. Perpetual Succession - A company can have investors all over the world, and all those people investing capital to it are its members or shareholders. Even if one of the members dies, the company continues to function incessantly.

  1. Board of Directors - It is elected by the company’s shareholders for the management purpose. However, the ownership of the company resides with all its members and not just the Board.

  1. Seal - Like every person has his unique signature, a company has its exclusive seal which is imprinted on all the agreements and documents pertaining to the company’s windings.

What is a Share in terms of Company Accounts Introduction?

A share is defined as a unit of ownership representing a part of the company’s combined capital. It is an element of company accounts which brings in investment in the form of money or other assets. It is mainly of two types -

  1. Preferential Shares - Members holding preferential shares are given a fixed dividend irrespective of the profit earned by the company. Also, in case the corporation shuts down due to any reason, preference is given to these shareholders at the time of repayment.

  1. Equity Shares - The amount of dividend received by these shares depends upon the net profit made by the company. Investors in such shares have the right to vote in the company’s decision-making process.

The Balance Sheet

The company accounts introduction is incomplete without the dissertation of the balance sheet. It is regarded as a statement of the company’s financial position at a given point of time, in terms of its assets, liabilities and shareholder’s equity such that the amount of assets is always equal to the sum of liabilities and equity.

Asset - It is a resource possessed by a financial entity that has a positive economic value.

  1. Current Asset - It refers to all the assets that are on the balance sheet for less than a year. It includes the available cash at the time of preparation of the balance sheet, the money to be received from various sources, the stocked inventory and the prepaid expenses.

  1. Non-Current Asset - It is also called a long-term asset as it remains on the balance sheet of company accounts for more than a year. It consists of the manufacturing units, equipment, land, property, furniture, etc.

Liability - It is a financial debt owed by a company to other entities as a result of past transactions or favours received as capital investment.

  1. Current liability - It includes the amount payable to the suppliers, the payroll, and the tax.

  1. Non-Current Liability - It comprises loans and other debts not required to be paid within a year.

Equity - It is the amount of money that would be left with the company after paying off all its liabilities. In other words, it represents the net worth of a corporation.

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Fun Fact: Did You Know? 

Ronald Wayne, a self-taught computer engineer, co-founded Apple as a partnership with Steve Wozniak and Steve Jobs. He owned 10% of the company’s shares which he sold back to his partners for $800 just 12 days later. Today, a 10 percent stake in Apple would be worth about $94 billion, a fortune Wayne let slip out his hands.

FAQ (Frequently Asked Questions)

1. How Does a Public Company Differ from a Partnership in Terms of Capital and Liability?

Common people generally tend to have confusion regarding the operations and functions of a public firm with a partnership. The extent of liability of the shareholders, in the case of a public company, is limited by the value of shares purchased by them. However, for the members of a partnership firm, the liabilities are unlimited. The partners are jointly and individually liable to pay all the debts of the firm, regardless of the amount of capital invested by that person. In terms of capital, there is no minimum capital requirement for starting a partnership, whereas a minimum capital of 5 lakhs is mandatory for establishing a public company.

2. Why Do the Credit and Debit Sections of the Need to Match?

The balance sheet is perhaps the most significant account included in the final accounts segment. A balance sheet is based on the principle of double-entry. This accounting method records all transactions at least twice in the system, and therefore also acts as a check to make sure all the entries are correctly placed. Let us understand this with the help of an example; suppose a company decides to sell its assets worth $50,000. This would decrease the company’s assets by $50,000 while at the same time, would increase the company’s cash by $50,000. Thus, everything comes out to be balanced.

3. Explain the Concept of Profit and Loss Accounts.

Another important aspect of company accounts introduction, a profit and loss statement that summarizes the total revenues and expenses incurred by a company, over a specific period of time. It provides information about the ability of that company to engender profit either by increasing its revenues or by cutting the expenses.

It is different from a balance sheet in assessing the company's performance over a time span of, let's say, a year rather than providing just a snapshot like a balance sheet. It is one part of the company accounts introduction, and therefore should not be solely relied upon in estimating the financial stability of a company.