A Brief about Company Accounts
Established in the year 2013 Indian companies act states that "It will govern all the companies and will provide guidelines for them which they are bound to adhere to." A company is an association of people who come across voluntarily to each other and contribute money to satisfy a common purpose.
The capital of the company is established by the contribution of money by people and its members. So the capital of a company is known as "share capital" and the contributors are known as "shareholders".
A company is an association of persons who contribute money voluntarily for a common purpose. The contribution of money by them forms the capital of the company. The persons who contribute are the members of the company. This contributed money is known as share capital of the company and the contributors are its shareholders. This is governed by the Indian Companies Act.
Accounting is the system of recording financial transactions in the form of financial statements. The different types of company accounts are (1) asset, (2) liability (3) equity, (4) revenue, and (5) expense. Each of these account types has sub-accounts to record the details of transactions.
What are Shares?
Share can be defined as a share in the share capital of the company which includes stocks. According to section 2(84), the company act 2013, a share capital can be divided into several units of smaller denominations. These units are called shares.
Types of Share Capital:
Share capital can be classified into two types:
Equity share capital
Preference share capital
Equity share capital:
Equity shares have the maximum risk and reward both in a business in case the company has involved itself with high profits then they are more likely to receive a high payment from high dividends and increment in reputation in the market.
In any case, if the company is subjected to a loss then there is a huge risk of either losing a part of the shares or losing the whole of the shares, equity shares are not at all preferential.
Preference share capital:
As per the Indian companies act established in 2013 under section 43(b), preference share capital consists of preference shares. These are some preferential rights that are subjected to preference shares and they can be stated as described below:
In order to receive a dividend: a particular amount of payment is first done to a person who is holding preference shares at a fixed rate or amount by the company and the equity shareholders are paid after the payment is done for preference shareholders.
Repayment of capital: Before paying the equity shareholders the preferential shareholders receive the whole repayment during the winding uptime.
Company accounts have a totally different format which is quite different from sole proprietorship or partnership. It facilitates different ownership structures like shares and debentures. A specific law is also subjected to a definite format for the final accounts of the company.
Now that we have an idea of company accounts, let’s try to understand the calls in arrears meaning.
Call in Arrear
A company issues its shares in the market and the public purchases its shares. The company may either call the whole amount or partially by way of ‘calls’. The company calls for money from shareholders when needed within a certain period. If the shareholder is not able to pay the call amount due on an allotment or on any calls according to the terms before or on the specific date fixed for payment, such amount is taken as ‘call in arrears’.
Calls in Arrears in Balance Sheet
Once the company confirms the allotment of shares to a person, it becomes a valid contract and he becomes the shareholder. He is liable to pay the entire amount of shares. In case if the shareholder is not able to pay the call amount due on the allotment, the unpaid amount becomes a call-in-arrears. Such an amount of calls in arrears is shown in the liability side of the balance sheet by deducting from the called up capital. In case if the shares are forfeited, then it is deducted from the forfeited account.
Calls in Advance in Balance Sheet
The company, according to terms on issue of shares, may call for partial payment instead of lump-sum by way of calls. If the company accepts the amount against the calls, which are not made yet, the amount received in advance is called ‘calls-in-advance’. In the balance sheet, the call-in-advance is shown in the subhead other current liability under the Current Liabilities.
Calls in Arrears Journal Entry
When the shareholders make default in payment, the amount due is stated as Calls in Arrears. This amount is shown in the journal by opening a separate account called the Calls in Arrears Account and all such calls in arrears are charged an interest of 5% p.a. until the amount is repaid. Finally, the total (call in arrears entry) is shown in the balance sheet as a deduction from the Called up Capital.
Calls in Advance Journal Entry
A company, well authorized by the Articles can accept calls in advance from its shareholders but in the journal entry, the amount of call in advance cannot be credited to the capital amount.
Calls in Arrears Example
When financing is demanded from shareholders on calls, the respective accounts are debited. There are certain situations in which some shareholders cannot pay their dues on the allotment and/or on calls within the stipulated time. The amount which is not paid by defaulter shareholders is termed as calls in arrears and it shows a debit balance. The opening of ‘calls in arrears account’ supports in preparing the balance sheet since it is deducted from called up capital.
An example:
XXX Ltd made its first call @ of Rs. 3 on 10,000 shares. Mr A has not paid on the first call on his 200 shares. However, he paid this default amount after one month.
FAQs on Introduction to Company Accounts - Calls in Arrears
1. How do Calls in Arrears Appear in a Balance Sheet?
When a company issues its shares in the market, its shares are purchased by the public and they become the company’s shareholders. The company may call for a partial amount instead of a lump sum. At that time of call, sometimes the shareholders may not pay the amount called before the fixed date. That amount is taken as ‘call-in-arrears’.
Thus, the Share Allotment Account gets closed. The total amount of calls in arrears is deducted from called up capital in the balance sheet to arrive at the paid-up capital. The calls in arrears account always have a debit balance and they are shown in the balance sheet on the liability side.
When the amount gets collected, the bank account is debited while the calls in arrears are credited.
2. Explain the Methods for the Accounting of Calls in Arrears.
There are two methods for an accounting of calls in arrears.
The first method is without opening the Call-in-Arrears account. Under this method, the amount received from the shareholders may be appropriated in the relevant call account. The various call accounts will show a debit balance equal to the total unpaid amount of calls. If the company receives the number of call-in-arrears at a later date, the bank account is debited and the relevant call account is credited.
The second method is by opening Call-in-Arrears account. Under this method, the unpaid amount is transferred to the Call-in-Arrears Account. As a result, Share allotment Account and Shares Call Account will not show any balance.
The Call-in-Arrears will show a debit balance equal to the unpaid amount on allotment and calls. On receipt of the call arrears amount, the Calls-in-Arrears account will be credited.
3. What is meant by deemed preference share capital?
Deemed preference share capital can be satisfied if they ensure both the rights as described below:
Along with the preferential right to payment of dividends, it has a right to participate too. This right to participate can be a fully extended version for a limited extended version
Along with the repayment of capital rights, it possesses a right to participate too. This can also be in a fully extended version or a limited extended version.
4. What are the types of share capital that are described in a balance sheet?
These are basically of five types namely authorized or nominal capital, issued capital, subscribed capital, called up capital and paid-up capital.
The maximum amount of capital beyond which a company is not allowed to issue any shares to the public is termed as authorized or nominal capital.
Issued capital can be described as the amount of capital that is offered to the public for subscription.
The company receives a particular amount of subscription amount and then the company allots a particular amount to the public. It can be less or equal to the issued capital.
Usually, a company calls the shareholders to pay for the shares. They don't ask for the full amount at once; the portion of the amount asked by the company is termed as called up capital and the remaining portion is called uncalled capital.
The amount of capital that is included in the balance sheet total and is paid up by the shareholders is termed as paid-up capital.
5. What do you mean by under subscription and oversubscription?
There is the amount of capital issued by the company to the public for subscription. The company is more likely to face two types of situations while doing this subscription part; these are under subscription and oversubscription. When the company gets a lesser subscription than the total subscription it has issued then the particular condition is termed as under subscription where if it gets a larger subscription than the predictable subscription it has issued then the condition is known as oversubscription.
6. What do you mean by the issue of shares to promoters?
To enhance the formation of a company, companies sometimes issue shares to the promoters or lawyers or anyone who can render services for the sake of the good of the company. In general, the company doesn't have any significant profit while doing this particular act. This can be done in a number of ways such as technical assistance, legal guidance, engineering services, etc.
7. What do you mean by debentures and debentures issue?
Debentures are nothing but proper documentation of the fact the company is liable to pay a particular amount of money with interest. It's a certificate of debt that generates liability. According to the prospectus of a particular company, the investors apply security (debentures) which is called debentures issue.
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8. How do Calls in Arrears Appear in a Balance Sheet?
When a company issues its shares in the market, its shares are purchased by the public and they become the company’s shareholders. The company may call for a partial amount instead of a lump sum. At that time of call, sometimes the shareholders may not pay the amount called before the fixed date. That amount is taken as ‘call-in-arrears’.
Thus, the Share Allotment Account gets closed. The total amount of calls in arrears is deducted from called up capital in the balance sheet to arrive at the paid-up capital. The calls in the arrears account always have a debit balance and they are shown in the balance sheet on the liability side.
When the amount gets collected, the bank account is debited while the calls in arrears are credited.
9. Explain the Methods for the Accounting of Calls in Arrears.
There are two methods for an accounting of calls in arrears.
The first method is without opening the Call-in-Arrears account. Under this method, the amount received from the shareholders may be appropriated in the relevant call account. The various call accounts will show a debit balance equal to the total unpaid amount of calls. If the company receives the number of call-in-arrears at a later date, the bank account is debited and the relevant call account is credited.
The second method is by opening a Call-in-Arrears account. Under this method, the unpaid amount is transferred to the Call-in-Arrears Account. As a result, Share allotment Account and Shares Call Account will not show any balance.
The Call-in-Arrears will show a debit balance equal to the unpaid amount on allotment and calls. On receipt of the call arrears amount, the Calls-in-Arrears account will be credited.