Prof. B.D.Panda

Accounts of Limited Liability Company

Limited liability company

• A company can be defined as an artificial person, invisible, intangible created by or under law with a discrete legal entity, perpetual succession and a common seal. It is not affected by the death, insanity or insolvency of an individual member.

• A company is called as a Limited-Liability company because the liability of its members is limited to the amount that they have agreed to contribute to the company by way of share capital.

Types of Share Capital

A company can issue two types of share capital: equity share capital and preference share capital.

Equity share capital is otherwise known as owner’s capital. It is the fraction of total owner’s capital. The capital invested by the owners in an organization. Equity share holders are the real owners of the organization.

Preference Share Capital

• Preference share holders are having a preferential rights on profit. They have a right to be paid a fixed amount from the profit after paying to the outsiders.

• On a winding up or repayment of capital, they have the right to be paid the amount of the capital paid and any fixed premium or premium on any fixed scale, as specified in the memorandum or articles of the company.

Types of Preference Share capital

• Cumulative or non-cumulative: In case of Cumulative preference share, if there is no adequate profit in the company for a particular year. In case of non cumulative preference share, the unpaid dividend is not accumulated.

• Redeemable preference share and irredeemable preference shares.

• Convertible and non-convertible preference stock.

Debentures

• Companies borrow from the financial market by issuing debentures. A debenture is a document, which either creates a debt or acknowledges the same under the seal of the company.

• Thus debentures holders are creditors of the company. Interest on debentures are the charge against the profit.

• The company issues the certificate to the debenture holders which is an acknowledgement of debt.

Shareholders and Debenture holders

• A share holder is a member of the company and has a ownership rights, where as a debenture holder is simply a creditor of the company.

• A debenture holder is entitled to a fixed rate of interest where as share holders get the dividend.

• Debenture holders are paid back within a specified period mentioned but share holders are not paid back.

• The interest is paid first to the debenture holders but dividend paid after the interest paid.

Share capital, Face value and Book value

• Share capital includes both the equity capital and preference capital.

• The company stipulates a certain price for the shares in its memorandum of association. Which is otherwise known as Face value of the share.

• The book value of the share changes with the changes in the value of the net worth.

Authorized Capital

• Authorized capital is the capital which is mentioned in the Memorandum of Association of the company at the time of incorporation of the company.

• The company can not issue more than that the authorized capital.

• Suppose a company is having a authorized capital of Rs. 1 lakh out of which equity is Rs. 80 thousand and Preference is Rs. 20 thousand than the total face value of the equity share and preference share should not exceed the the authorized amount.

Issued, Subscribed and Paid up capital

• Issued capital represents the capital that is offered to the public for subscription.

• Subscribed capital is that part of the issued capital, which has been subscribed by the public.

• Called-up capital is that part of the subscribed capital, which has been called for payment.

• Paid up capital is that part of the called up capital, which has been actually paid by the share holders.

Forfeiture and Reissue of shares

• Articles of Association of companies usually authorize directors to forfeit shares of a member on account of non- payment of call after serving him a prior notice as prescribed by the articles.

• Directors may either cancel forfeited shares or reissue those shares at a discount.

• On forfeiture of the shares issued at a premium, the balance in the share premium account should not be disturbed.

Bonus Issue

• Companies capitalize free reserves, share premium and capital redemption reserve by issuing bonus shares to members.

• Issue of bonus shares does not result in inflow of funds to the company, it results in conversion of reserves into issued and subscribed capital.

Right Issue

• Subsequent issue of shares by an existing company to existing share holders are known as Right issue.

• The issue can be made at any time after the expiry of two years from the formation of the company or the expiry of one year from the first allotment of shares in the company, which ever is earlier.

• Such further shares shall be offered to the persons who on the date are the holders of equity shares of the company proportionately to their equity holdings on that date.

Buy-Back of Shares

• Buy back of shares means when a company purchases its own shares from the market.

• Generally the company buy back its shares and other specified securities out of their free reserves, securities premium account and other reserves.

• The buy-back of securities should not exceed 25% of its total paid up capital.

Issue and Redemption of Debentures

• Debenture is issued by the company in the market to raise debt from the market.

• The debentures can be issued at a premium. When it will be issued at a premium, then the amount is credited to the debentures premium account.

• When the debentures will be issued at a discount then that amount will be shown in the balance sheet and will be written off over a number of years in the ratio of amount utilized.