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Introduction to Company Accounts - Calls in Advance

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Last updated date: 22nd Mar 2024
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Calls in Advance - Company Accounts

A company is a voluntary group of people who contribute money for a common purpose that may be profit or non-profit in nature. It is a separate legal entity. The money thus contributed, is called the share capital of the company, and the contributors are called the investors or the shareholders. Indian Companies Act, 2013 administers all companies and provides guidelines for them to follow.

Company accounts are a condensed summary of all sorts of financial activities of the company that it has committed in a period of twelve months. Company accounts include all sorts of financial statements ranging from the financial Balance Sheets, the Profit and Loss Statement to the Cash Flow Statement. The contributions done by the actual investors of the company which are always paid in advance are shown as calls in advance. This amount which is received as calls in advance is usually shown as credits in accounts because the amount is received in excess of what the company actually needs.


Calls in Arrears in Balance Sheet 

Calls in the Arrears Account appear in the Notes to Accounts on Share Capital to the Balance Sheet. It is shown as a deduction from the amount of 'Subscribed but not fully paid-up' under 'Subscribed Capital’. The amount is called paid-up capital. Though the interest is chargeable in calls in arrears, according to the provisions of the Articles of the company, the directors of the company do have the right to waive off the interest on calls in arrears.

 

Calls in Advance in Balance Sheet

The meaning of calls in advance is that the excess amount received by the company exceeds what has been called up. They appear separately, in the Balance Sheet as the company’s liability. The company retains such an amount to make the shares fully paid. Once this amount is transferred to the relevant accounts the calls in advance are closed.

It comes under the heading 'Current Liabilities' till the calls are made and the amount becomes payable by the shareholder.

 

Calls in Arrears Journal Entry

In case of any default, the amount is called as Calls in arrears and a separate Calls in Arrears Account has to be opened, to make the call in arrears entry. An interest of 5% p.a. is charged on all such calls in arrears until the amount is repaid. And, finally, the total is brought to the balance sheet as a deduction from the Called up Capital.

 

Call in Advance Journal Entry

At times, the company’s shareholder pays a portion or full of the amount due on the shares held in advance. It is an important fact that calls in advance never form a part of the share capital, even though it is being paid by the shareholders. An authorized company can accept calls in advance from its shareholders but the amount of call in advance in the journal entry cannot be credited to the capital amount. Call in advance needs to be credited to the calls in the advance account. 

 

Interest on Calls in Advance

The amount received as calls in advance is written as a liability and the company is liable to pay interest from the date of receipt till the date that the call gets due for payment. A rate of 6% p.a. interest is charged on these calls in advance meaning the articles of the company authorized for the same. This interest has to be paid to the shareholder even when the company does not earn a profit.

FAQs on Introduction to Company Accounts - Calls in Advance

1. Differentiate Between Call in Arrears and Call in Advance.

The difference between calls in arrears and calls in advance is explained below in detail:

  1. Calls in arrears are the amount that defaulter shareholders called up by the company, whereas calls in advance are the amount that is received in advance from shareholders.

  2. Calls in arrears can be recovered in the future whereas calls in advance can be adjusted in the future.

  3. Interest from calls in arrears is listed as the income of the company whereas the Interest from calls in advance is listed as the expenses of the company.

  4. The membership will be lost if calls in arrears are not cleared whereas there is no question of losing the membership in case of calls in advance.

  5. The maximum rate of interest in calls in arrears is 5% p.a. whereas it is 6% p.a. in calls in advance.

2. Explain Calls in Advance in Detail.

The excess money that the company receives from the shareholders is termed as calls in advance. Any company accepts calls in advance if authorized by its Articles. The amount thus received has to be credited to the "calls in advance" account. It is treated as a debt until it makes the calls. The amount paid previously is adjusted. 


The situation of Calls in advance arises when the quantity of shares allotted to a particular person is lesser than the number applied by him. At that time, the terms of the issue allow the company to hold the amount received in excess. The company holds only the amount that is required to make the allotted shares fully paid. Once the amount is transferred to the relevant call accounts, the calls in the advance account are closed by the company. This amount is reflected under the "call in advance" account, separately on the liabilities side.

3. What are the statements included in a company account?

Company account involves all types of financial transactions of the company in a year. The account involves the following heads:

  • The balance sheet is a statement showing all assets and liabilities of the company at a specific time. It can give an insight into the financial health of the company.

  • A profit loss statement is a statement that actually reflects the performance of the company in a year. It will show all the revenues generated in a year by the company and compare it with all the expenses incurred by the company.

  • The cash flow statement gives the actual information about the cash that enters and goes out of the business. It records the cash flow when the money is actually received by the company.

4. What are the steps to prepare a company account?

A small company account includes only the balance sheet, profit-loss statement and cash flow statement. However a big company needs 

  • A note to the accounts which gives relevant information in support of the account statements, director’s and auditor’s report along with the above statements.

  • Director’s report prepared by the board of directors which hints about the future prospects and plannings of the company discussing the present performance of the company.

  • An auditor's report is prepared by an external trained auditor or often a chartered accountant. It actually gives a clear statement on the fairness and transparency of the accounts of the company annually. It also states the duties of company directors. A comment expressing whether the company is fair and true in maintaining its accounts.

5. List the point of difference between calls in arrears and calls in advance.

The difference between calls in arrears and calls in advance is explained below in detail:

  • Calls in arrears actually refer to the amount due on calls by one or more of the shareholders. This is actually the non-paid amount that a  defaulter shareholder is yet to pay, whereas calls in advance refer to the excess amount that one or more of the shareholders have paid in advance.

  • Calls in arrears is thus a debit amount in the balance sheet while calls in advance show a credit balance.

  • The company can charge interest on the called in arrears amount hence it is an income for the company, but in case of calls in advance the company has to pay interest for a period of when it is paid to when it is adjusted as a result, it is an expense for the company.

  • Calls in arrears need to be recovered in the future whereas call in advance has to be adjusted in the future so it is considered as a liability.

  • In case the defaulter shareholder does not repay back the due amount of call in arrears he or she may lose his membership but no such situation can ever rise in case of call in advance.

6. How is the call in advance adjusted or treated in the account?

Call in advance is always a liability for the company. It is in fact shown under the heading of current liability in the balance sheet since it has to be paid back to the shareholder or adjusted in the balance sheet. The company also has to pay interest to this amount for a period ranging from when it has been accepted and when it is adjusted. If the company itself remains silent about this amount then the interest of 6% has been fixed which the company has to pay along with the actual amount to the shareholder even if the company makes no profit.

7. What is the importance of this chapter in the CBSE curriculum?

CBSE has well-designed the curriculum for each and every class keeping in mind how the study today can actually help the students in their future careers.  Students who have chosen the commerce stream in their Class 11-12 CBSE board have an opportunity to prepare themselves efficiently for the future commerce field. In the class 12 accountancy syllabus, this chapter of company accounts has been rightly included since many of the students want to be chartered accountants and top accounts officers in the future. Those aspiring chartered accountants need to build their concepts about finance and accounts right from the school level.