1 Module 3. Recording Financial Transation Dr. Varadraj Bapat

2 Index Corporate Accounting Share Capital and its types Issue of share capital Debentures – issue and redemption and purchase of own debentures

Dr. Varadraj Bapat3 Index Corporate Accounting This file discusses various entries which are peculiar to companies.

Dr. Varadraj Bapat4 Corporate Accounting Share Capital   Total capital of the company is divided into a number of small indivisible units of a fixed amount and each such unit is called a share.   As the total capital of the company is divided into shares, the capital of the company is called ‘share capital’.

Dr. Varadraj Bapat5   The fixed value of a share, printed on the share certificate is called nominal/ par/ face value of a share.   A company can issue shares at a price different from the face value of a share; this is issue price of share.   Types of shares Shares issued by a company are divided into two categories:

Dr. Varadraj Bapat6   Preference Shares: The shares which are assured of preferential dividend at a fixed rate during the life of company and carry a preferential right over other shareholders to be paid first in case of winding up of company.   Equity Shares: Equity shares are those shares, which are not preference shares. It means that they do not enjoy

Dr. Varadraj Bapat7 any preferential rights in the matter of payment of dividend or repayment of capital.   Issue of share capital   The shares can be issued by company either for cash or for the consideration other than cash.   A public company issues a prospectus inviting general public to subscribe for its shares. On the basis of prospectus, application

Dr. Varadraj Bapat8 are deposited in a scheduled bank by the interested parties along with the amount payable at the time of application in cash which is called as application money.   Company reserves the right to reject or accept an application fully or partially. Successful applicants become shareholders of the company and are required to pay the second installment which is known as allotment money.

Dr. Varadraj Bapat9   Subsequent installments, if any, to be called by the company are known as calls.   Journal Entries for issues of shares for cash 1.On the receipt of the application money Bank A/c…… Dr. To Shares Application money

Dr. Varadraj Bapat10 2.On the allotment of share Share Allotment A/c…..Dr. Share Application A/c…Dr. To Share Capital A/c To Securities Premium A/c (if shares are issued at premium) 3.On the receipt of allotment money Bank A/c…..Dr. To Share Allotment A/c

Dr. Varadraj Bapat11 4.On the call being made Share call A/c…..Dr. To Share Capital A/c 5. On receipt of call money Bank A/c……Dr. To Share Call A/c 6. If call money is received from shareholders even before making call

Dr. Varadraj Bapat12 Bank A/c….Dr. To Calls in Advance A/c 7. If money is not received from shareholders on any call Calls in Arrears A/c….Dr. To Share Allotment A/c To Share Call A/c

Dr. Varadraj Bapat13 The Articles of Association of a company usually empower the director to charge interest at a stipulated rate on calls in arrears. According to Table A of Companies Act 1956 interest at the rate of 5% p.a. is to be charged on unpaid calls from the due date of the call up to the actual payment.

Dr. Varadraj Bapat14 JE for interest receivable on call in arrears Shareholders A/c….Dr. To Interest on Calls in Arrears A/c For receipt of interest Interest on Calls in Arrears A/c…Dr. Shareholders A/c

Dr. Varadraj Bapat15 According to Table A of Companies Act 1956 interest at the rate of 6% p.a. is to be paid on calls in advance from the actual payment up to due date of the call. JE for Interest due Interest on Calls in Arrears A/c…Dr. To Shareholders A/c

Dr. Varadraj Bapat16 Payment of interest Shareholders A/c …Dr. Interest on Calls in Advance A/c

Dr. Varadraj Bapat17 Debentures Issuing debt instruments by offering the same for public subscription is one of the sources of financing the business activities. Debt financing does not only help in reducing the cost of the capital but also helps in designing appropriate capital structure of the company.

Dr. Varadraj Bapat18 Debenture is one of the most commonly used debt instrument issued by the company to raise funds for the business. A debenture/ bond is the a security issued by the company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest.

Dr. Varadraj Bapat19 Issue of debentures can be categorized into the following: 1. 1.Debenture issued at par and redeemable at par or at a discount 2. 2.Debenture issued at discount and redeemable at par or at a discount 3. 3.Debenture issued at premium and redeemable at par or at a discount Issue of debentures

Dr. Varadraj Bapat Debenture issued at par and redeemable at premium 5. 5.Debenture issued at a discount and redeemable at premium

Dr. Varadraj Bapat21 Journal Entries in each of the above cases are discussed below: 1. Debenture issued at par and redeemable at par or at a discount For receipt of application money: Bank A/c……Dr. To Debenture ApplicationMoney A/c

Dr. Varadraj Bapat22 For transfer of application money to debenture account: Debenture Application A/c To Debenture A/c 2.Debenture issued at discount and redeemable at par or at a discount For receipt of application money: Bank A/c……Dr. To Debenture Application Money A/c

Dr. Varadraj Bapat23 For transfer of application money to debenture account: Debenture Application A/c To Debenture A/c 3.Debenture issued at discount and redeemable at par or at a discount For receipt of application money: Bank A/c……Dr. To Debenture Application Money A/c

Dr. Varadraj Bapat24 For transfer of application money to debenture account: Debenture Application A/c Discount on issue of debenture A/c To Debenture A/c 4.Debenture issued at premium and redeemable at par or at a discount For receipt of application money: Bank A/c……Dr. To Debenture Application Money A/c

Dr. Varadraj Bapat25 For transfer of application money to debenture account: Debenture Application A/c To Debenture A/c To Securities premium A/c 5.Debenture issued at par and redeemable at premium For receipt of application money: Bank A/c……Dr. To Debenture Application Money A/c

Dr. Varadraj Bapat26 For transfer of application money to debenture account: Debenture Application A/c To Debenture A/c Call made consequent upon allotment: Debenture Allotment A/c Loss on issue of Debenture A/c To Debenture A/c To Debenture redemption Premium A/c

Dr. Varadraj Bapat27 6.Debenture issued at a discount and redeemable at premium For receipt of application money: Bank A/c……Dr. To Debenture Application Money A/c For transfer of application money to debenture account: Debenture Application A/c To Debenture A/c

Dr. Varadraj Bapat28 Call made consequent upon allotment: Debenture Allotment A/c Discount /Loss on issue of Debenture A/c (Discount + premium on redemption) To Debenture A/c To Debenture redemption Premium A/c

Dr. Varadraj Bapat29 7.Debenture issued at a premium and redeemable at premium For receipt of application money: Bank A/c……Dr. To Debenture Application Money A/c For transfer of application money to debenture account: Debenture Application A/c To Debenture A/c

Dr. Varadraj Bapat30 Call made consequent upon allotment: Debenture Allotment A/c Loss on issue of Debenture A/c (amount equal to premium on redemption) To Debenture A/c To Debenture redemption Premium A/c

Dr. Varadraj Bapat31 Redemption of debentures can be categorized into the following: 1. 1.Debenture issued at par and redeemable at par 2. 2.Debenture issued at discount and redeemable at par Redemption of debentures

Dr. Varadraj Bapat Debenture issued at premium and redeemable at par 4. 4.Debenture issued at par and redeemable at premium 5. 5.Debenture issued at a discount and redeemable at premium 6. 6.Debenture issued at a premium and redeemable at premium

Dr. Varadraj Bapat33 Journal Entries in each of the above cases are discussed below: 1. Debenture issued at par and redeemable at par -Closing debenture account Debenture A/c……Dr. To Debenture holders A/c

Dr. Varadraj Bapat34 -For payment of money to debenture holders: Debenture holders A/c To Bank A/c 2.Debenture issued at discount and redeemable at par -For transfer of loss of discount to profit & loss account: Profit & Loss A/c……Dr. To Discount on issue of debenture A/c

Dr. Varadraj Bapat35 the above entry may be repeated during the tenure of the debenture for writing off proportionate discount every year. -Closing debenture account Debenture A/c……Dr. To Debenture holders A/c

Dr. Varadraj Bapat36 -For payment of money to debenture holders: Debenture holders A/c To Bank A/c 3. 3.Debenture issued at premium and redeemable at par -Closing debenture account Debenture A/c……Dr. To Debenture holders A/c

Dr. Varadraj Bapat37 -For payment of money to debenture holders: Debenture holders A/c To Bank A/c 4. 4.Debenture issued at par and redeemable at premium -For transfer of loss of premium to profit & loss account:

Dr. Varadraj Bapat38 Profit & Loss A/c……Dr. To Loss on issue of debenture A/c the above entry may be repeated during the tenure of the debenture for writing off proportionate premium to be paid on redemption every year.

Dr. Varadraj Bapat39 -Closing debenture and premium account Debenture A/c……Dr. Debenture redemption Premium A/c……Dr. To Debenture holders A/c -For payment of money to debenture holders: Debenture holders A/c To Bank A/c

Dr. Varadraj Bapat Debenture issued at a discount and redeemable at premium -For transfer of loss of discount and premium to profit & loss account: Profit & Loss A/c……Dr. To Discount / Loss on issue of debenture A/c (Discount + Premium)

Dr. Varadraj Bapat41 -Closing debenture and premium account Debenture A/c……Dr. Debenture redemption Premium A/c……Dr. To Debenture holders A/c -For payment of money to debenture holders: Debenture holders A/c To Bank A/c

Dr. Varadraj Bapat Debenture issued at a premium and redeemable at premium -For transfer of loss of discount to profit & loss account: Profit & Loss A/c……Dr. To Loss on issue of debenture A/c (Premium on redemption)

Dr. Varadraj Bapat43 -Closing debenture and premium account Debenture A/c……Dr. Debenture redemption Premium A/c……Dr. To Debenture holders A/c -For payment of money to debenture holders: Debenture holders A/c To Bank A/c

Dr. Varadraj Bapat44 Debentures sometime are purchased in an open market and then cancelled on due date. Example, Company has issued % debentures for Rs interest being payable half yearly. The company purchases Purchase of debenture

Dr. Varadraj Bapat debentures at Rs. 98 per debenture cum interest (interest for 6 months). Journal Entries: Own Debenture A/c….Dr Interest A/c….Dr. 450 To Bank 9800

Dr. Varadraj Bapat46 Suppose out of these debentures 40 debentures sold at Rs. 102 ex interest and remaining are cancelled at the end of 6 months from date of purchase. Journal Entries Bank A/c…DR.4080 To Own Debentures 4080 To Interest A/c 60

Dr. Varadraj Bapat47 Own Debentures A/c…DR.340 To Profit & Loss 340 (Profit on sale transferred to P & L A/c) At the end of 6 months 9% debentures A/c….Dr.6000 To Own Debenture 5610 To Capital Reserve390 (Profit on cancellation transferred)