11 Corporate Accounting
11.1 Meaning and Scope
Corporate accounting is the branch of accounting that deals with the preparation of accounts of companies and the related transactions in their share capital, debentures, profits and reserves. The legal anchor in India is the Companies Act, 2013 — particularly the provisions on share capital (Sections 43–72), accounts (Sections 128–137), and dividends (Sections 123–127) (maheshwari2022?; shukla2022?; icai2024?).
A company under Section 2(20) is “a company incorporated under this Act or under any previous company law”. Three legal characteristics define it: separate legal personality, perpetual succession, limited liability of members (kapoor2023?).
| Pillar | Working content | Statutory anchor |
|---|---|---|
| Separate legal personality | The company is a person distinct from its members | Salomon v. Salomon (1897); Sec. 9 |
| Perpetual succession | Membership changes; the company continues | Section 9 |
| Limited liability | Members liable only to the extent of unpaid amount on shares | Sec. 2(22), 2(46) |
11.3 Issue of Shares
Shares may be issued at par, at a premium or — only in narrow cases (sweat equity under Section 54) — at a discount. Section 53 generally prohibits the issue of shares at a discount.
11.3.1 Issue at par
Subscription money is received in instalments — application, allotment, first call, final call. Each receipt is journalised in the standard sequence:
| Stage | Entry |
|---|---|
| On application money received | Bank A/c Dr. To Share Application A/c |
| On allotment | Share Application A/c Dr. To Share Capital A/c (transfer of accepted application money) |
| On allotment money due | Share Allotment A/c Dr. To Share Capital A/c |
| On allotment received | Bank A/c Dr. To Share Allotment A/c |
| On call due | Share Call A/c Dr. To Share Capital A/c |
| On call received | Bank A/c Dr. To Share Call A/c |
11.3.3 Issue at a discount (Sec. 53)
Generally prohibited. The only exception is sweat equity shares issued under Section 54 to directors and employees in consideration of know-how or services.
11.4 Forfeiture and Reissue of Shares
If a shareholder fails to pay the call money, the directors may, after due notice, forfeit the shares. The amount already received is transferred to a Forfeited Shares Account (capital reserve in nature).
When forfeited shares are reissued — usually at a discount — the discount allowed must not exceed the amount already received on the forfeited shares. Any surplus in the Forfeited Shares Account after reissue is transferred to the Capital Reserve.
| Step | Treatment |
|---|---|
| Forfeiture | Debit Share Capital with called-up amount; debit Securities Premium (only if not received); credit unpaid calls; credit Forfeited Shares A/c with amount received |
| Reissue at discount | Bank with cash; Forfeited Shares A/c with discount; credit Share Capital with paid-up amount |
| Surplus on reissue | Transferred to Capital Reserve |
11.5 Redemption of Preference Shares
Section 55 governs redemption of preference shares. Three working rules:
- Only fully paid preference shares can be redeemed.
- Redemption may be made out of (a) profits available for dividend, or (b) the fresh issue of shares, or both — never out of capital.
- A sum equal to the nominal value of shares redeemed out of profits must be transferred to the Capital Redemption Reserve (CRR). The CRR can be used only for issuing fully paid bonus shares.
The premium on redemption may be paid out of profits or out of the Securities Premium Account.
11.6 Issue and Redemption of Debentures
A debenture is an instrument acknowledging a debt; it is part of a company’s borrowed capital, not its share capital. Debentures may be issued at par, at premium or at discount; the discount on issue of debentures is a capital loss and is written off over the life of the debenture.
| Method | Working |
|---|---|
| Lump-sum payment at maturity | Pay face value (and premium) on redemption date |
| Annual instalments | Redeem a fraction each year, by lottery |
| Purchase from open market | Buy own debentures at market price; cancel or hold as investment |
| Conversion into shares | Convert debentures into equity or preference shares |
A Debenture Redemption Reserve (DRR) is required by Section 71 read with Rule 18 of the Companies (Share Capital and Debentures) Rules — currently 10 per cent of the face value of debentures for unlisted companies (with exemptions for listed and NBFCs). A Debenture Redemption Investment of 15 per cent of debentures maturing in the year is also required (per the Rules as periodically updated).
11.7 Bonus Shares
A bonus issue is the allotment of fully paid shares to existing shareholders free of cost, in proportion to their holding. It capitalises the company’s reserves. Section 63 permits a bonus issue out of:
- Free reserves
- Securities Premium Account
- Capital Redemption Reserve
A bonus issue cannot be made out of revaluation reserves and is not a substitute for dividend.
11.8 Buy-back of Shares
Section 68 permits a company to buy back its own shares, subject to conditions:
- Buy-back is permitted out of free reserves, Securities Premium A/c, or proceeds of fresh issue of shares (not the same kind being bought back).
- Maximum buy-back in a financial year by board resolution = 10 % of paid-up equity + free reserves; with special resolution = 25 % of paid-up capital + free reserves.
- Post buy-back, debt-equity ratio cannot exceed 2 : 1.
- An amount equal to the nominal value of shares bought back is transferred from free reserves to the Capital Redemption Reserve.
11.9 Profit Prior to Incorporation
When an existing business is acquired by a company with retrospective effect, the period between the date of acquisition and the date of incorporation generates profit prior to incorporation. This profit is capital in nature and must be credited to the Capital Reserve. Profit after incorporation is normal revenue profit and goes to the P&L Appropriation Account.
The split is computed by allocating items between the two periods on a reasonable basis — time ratio (rent, salaries, depreciation), sales/turnover ratio (gross profit), or actual basis (commission to vendor for the pre-incorporation period, directors’ fees for the post-incorporation period).
11.10 Underwriting of Shares
Underwriting is an arrangement by which one or more parties (the underwriters) agree to take up unsubscribed shares in return for a commission. The commission rate, under Companies (Prospectus and Allotment of Securities) Rules, is up to 5 per cent of the issue price for shares and 2.5 per cent for debentures.
The underwriter’s liability is computed as: Gross liability − Marked applications received (in the absence of firm underwriting). Firm underwriting obliges the underwriter to subscribe to a stated number of shares irrespective of public response.
11.11 Rights vs Bonus Issue
| Dimension | Rights issue | Bonus issue |
|---|---|---|
| Statutory anchor | Section 62 | Section 63 |
| Consideration | Money paid by shareholder | Free of cost |
| Source | Fresh capital from existing shareholders | Capitalisation of reserves |
| Effect on cash | Cash inflow | No cash effect |
| Renunciation | Allowed (rights can be renounced) | Not applicable |
11.12 Final Accounts of a Company
The Companies Act 2013 requires every company to prepare:
- Balance Sheet in the format of Schedule III, Part I.
- Statement of Profit and Loss in the format of Schedule III, Part II.
- Cash Flow Statement (except small and OPC).
- Statement of Changes in Equity (Ind-AS only).
- Notes to Accounts with the disclosures required by the Act and applicable Standards.
Schedule III prescribes a vertical form of presentation. Items are classified into Equity and Liabilities (Equity, Non-current liabilities, Current liabilities) and Assets (Non-current, Current).
11.13 Exam-Pattern MCQs
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| Category | Meaning | ||
| (i) | Authorised capital | (a) | Capital actually received from subscribers |
| (ii) | Subscribed capital | (b) | Maximum capital the company can issue per its Memorandum |
| (iii) | Paid-up capital | (c) | Portion of called-up capital received |
| (iv) | Reserve capital | (d) | Uncalled capital callable only on winding up |
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| Provision | Section | ||
| (i) | Issue of shares at a discount (sweat equity) | (a) | Section 63 |
| (ii) | Securities Premium Account | (b) | Section 54 |
| (iii) | Bonus shares | (c) | Section 52 |
| (iv) | Redemption of preference shares | (d) | Section 55 |
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| Term | Content | ||
| (i) | Bonus issue | (a) | Permitted up to 5 % of issue price |
| (ii) | Rights issue | (b) | Free shares to existing shareholders out of reserves |
| (iii) | Underwriting commission on shares | (c) | Fresh shares offered to existing shareholders for cash |
| (iv) | Debenture Redemption Reserve | (d) | Required at 10 % of face value (per current rules, with carve-outs) |
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- Three legal pillars of a company: separate personality, perpetual succession, limited liability.
- Six capital categories: Authorised → Issued → Subscribed → Called-up → Paid-up, plus Reserve Capital (callable only on winding up).
- Securities Premium (Sec. 52) uses: bonus shares, write off preliminary/issue expenses, premium on redemption, buy-back. Not for cash dividend.
- Discount on issue prohibited (Sec. 53) — exception: sweat equity (Sec. 54).
- Forfeiture: amount received → Forfeited Shares A/c; on reissue, surplus → Capital Reserve.
- Preference share redemption (Sec. 55) out of profits → transfer to Capital Redemption Reserve (CRR).
- Bonus issue (Sec. 63) out of free reserves, Securities Premium, CRR; not from revaluation reserve.
- Buy-back (Sec. 68): ≤10 % (board) / ≤25 % (special resolution) of paid-up + free reserves; debt-equity ≤ 2 : 1.
- Profit prior to incorporation → Capital Reserve; profit after → P&L A/c.
- Underwriting commission: ≤ 5 % on shares, ≤ 2.5 % on debentures.
- Final accounts in Schedule III format (vertical), with split of Equity and Liabilities vs Assets, current vs non-current.