Company
Account- Introduction
By
Asok Nadhani
25.1 Company
Company form of organization is one of the ingenious creations
of human mind, which has enabled the business to carry on its wealth creation
activities through optimum utilization of resources. It represents different
kind of associations, both business and otherwise.
(i)
The
word ‘company’ derived from the Latin word ‘com’ means (with or together) and
‘panis’ (means bread). In law, it refers to a company formed and registered
under The Companies Act, 1956 or some earlier similar acts. A company may be an
incorporated, or a corporation, or an unincorporated company. An incorporated
company is an artificial person whereas an unincorporated company is a group of
person like partnership.
(ii)
As per
Sec. 3 (i)(ii) of the company Act, 1956, a company is defined as, “a company
formed and registered under Companies Act,1956 or any Companies Act enacted
prior to that”.
25.2 Characteristics of a
company
1
Separate Legal Entity: A company is regarded as an entity separate
from its members and has an independent corporate existence. For example, Gupta
& Co. is an entirely different person from Gupta, even if he holds
practically all the shares in the company. The company’s property is not the property
of Gupta.
2
Limited Liability: In a company limited by share or limited by
guarantee the liability or member is limited. For example, if face value of a
share in a company is Rs.10 and a shareholder paid Rs.5 per share, he can be
called to pay not exceeding Rs.5 per share during the life time of the company,
as his liability is limited by share.
3
Perpetual Succession: Perpetual Succession denotes the ability of
a company to maintain its existence by the constant succession of new
individuals who step into the shoes of those who cease to be members of the
company. The death or insolvency of any shareholder (or even all of them) does
not affect the life of a company. For example, if all the members of a private
company die in an accident, the company will not die.
4
Common Seal: On incorporation, a company acquires legal entity with
perpetual succession and common seal, which acts as the official signature of a
company. All documents signed on behalf of the company must bear the common
seal of the company.
5
Separate Property: As a distinct person from its members, a
company can own and dispose property on its own name. The property of a company
is not the property of the individual members.
6
Transferability of Shares: The capital of a company is divided into
shares. These shares, subject to certain conditions, are freely transferable. A
member can realise the invested money by selling his shares in the open market.
The stock market provides adequate facilities to purchase or sale of shares.
7
Periodic Audit: The accounts of company get periodically
audited through chartered accountants appointed by the shareholders on the
recommendation of board of directors.
8
Termination of Contract: A company, an abstract and artificial
person, does not die natural death. Existence of a company is terminated by winding
up (or through reconstruction, amalgamation etc).
25.3 Difference between
Partnership and Company
|
Basis
of Difference
|
Company
|
Partnership
|
|
1.
Legal Status
|
A company is a distinct legal person from its
members as it is created by law.
|
Partnership is not distinct from its members (partners)
who form the partnership firm.
|
|
2. Property
|
The property of a company is not the property of the
individual members.
|
In partnership firm, the partners are the joint
owners of the firm property.
|
|
3.
Liability of Members
|
The creditors of a company are not creditors of its
members.
|
Creditors of partnership firms are creditors of
individual partners.
|
|
4. Agents
|
Members of a company are not agent of company, as
they can not dispose any property of a company.
|
Partners are the agents of a firm as they can
dispose of property.
|
|
5. Contract
|
A member of a company can contract with the company.
|
A partner can not contract with his firm.
|
|
6.
Transfer of Shares
|
A member can sell his shares in the open market.
|
A partner can not transfer his share without the
consent of other partners.
|
|
7.
Management
|
A company is administered and managed by its
managerial personnel and members have no right to take part in the
management.
|
Every partners of the partnership firm takes part in
the management.
|
|
8.
Limited Liability
|
Liability of a member of a company may be limited by
shares or guarantee.
|
A partner’s liability is always unlimited.
|
|
9.
Perpetual Succession
|
The death or insolvency of shareholders or all of
them does not affect the life of a company.
|
The death or insolvency of a partner may dissolve
the partnership firm.
|
|
10.Maintenance
of Books
|
The accounts of company get periodically audited
through chartered accountants appointed by the shareholders on the
recommendation of board of directors
|
It is not mandatory for partnership firms to get the
account audited by a Chartered Accountant.
|
25.4 Types of Company
i) Statutory Company
All companies, which operate under the
special act passed by the State Legislature or parliament, are called Statutory
Companies (like Unit Trust of India, Life Insurance Corporation, Reserve Bank
of India, State Bank of India etc). Such companies are not required to use the
word ‘limited’ as part of their name. The accounts of these companies are audited
by Comptroller and Auditor General of India
ii) Government Company
According to the Sec.617 of the Companies
Act, 1956, “a Government company means any company in which not less than 51%
of the paid up capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly by
one or more State Government and includes a company which is a subsidiary
company of a Government Company.
iii) Foreign Company
A foreign company is a company which is
incorporated in a country outside of India India
iv) Holding and Subsidiary Company
[Sec .4(4)]- A company is known as the
holding company of another company if it has control over that other company.
[Sec .4(1)]- A company becomes a subsidiary
company when other company controls or holds 51% or more of its paid up share
capital, or has right to appoint directors on its board, or is a subsidiary of its
another subsidiary company.
v) Registered Company
These are the companies which are formed
and registered under the Companies Act, 1956 or were registered under any of the
earlier Companies Acts. These types of companies are mostly commonly found.
vi) Investment Company
The principal business of these types of
companies are acquiring, holding and dealing in shares and securities. They earn
income by way of interest, dividend etc.
vii) Finance Company
These are non banking institutions which
carry on its business through any of the following activities-
-
By way
of making loans and advances.
-
Acquiring
shares and securities and bonds etc.
-
The
letting or delivery of any goods to a hirer under the hire purchase agreement.
-
The
carrying of any class of insurance business.
Companies engaged in Housing finance, loan,
investment are examples of Finance Companies.
viii) Public Company
A public company means a company which:
a. Is not a private company.
b. Has a minimum paid up capital of 5 lakhs or
such higher paid up capital as may be prescribed.
c. Is a private company which is a subsidiary
of a company which is not a private company.
ix) Private Company
[Sec.3(1) (iii)] , A private company is a
company, which has a minimum paid up capital of one lakh rupees or such higher
paid up capital as may be prescribed, and by its articles:
a. Restricts the right of members to transfer
its shares.
b. limits the number of its members to fifty
not including-
i. The employee of the company
ii. Persons having been formerly in the
employment of the company were members of the company while in that employment
and have continued to be members after the employment ceased.
c. Prohibits any invitation to the public to
subscribe any shares, in or debentures of, the company; and
d. Prohibits any invitation or acceptance of
deposits from persons other than its, members, directors or their relatives.
A private company must have its own Articles
of Association which must contain the conditions as laid down in Sec.3 (1)
(iii) (Sec.26).
x) Limited Company
As per Sec.2 (23), a Limited Company means
a company limited by shares or guarantee.
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Companies limited by shares: In such company, the liability of the
members is limited to the amount unpaid on the shares.
-
Companies limited by guarantee: In such company, the liability of the
members is limited to a fixed amount which the members undertake to contribute
to the assets of the company, in case of winding up.
xi) Unlimited Company
A company in which the liability of the
shareholders is not restricted to the value unpaid shares is known as unlimited
company. An unlimited company may or may not have any share capital. It may be
a public or private company. It must have its own Articles of Association.
xii) Listed Company
It refers to those companies, whose
securities are listed in Stock Exchange for trading.
xiii) Unlisted Company
It refers to those companies, whose
securities are not listed in Stock Exchange for trading.
25.5
Promoter
A promoter is a person who does the
necessary preliminary work i.e. setting plan to the formation of the company.
In fact, they are the first persons, who control a company’s affairs, take necessary
steps to incorporate it and provide initial capital to start the company. After
the completion of preliminary work, the control of the company is handed over to
its directors (who are often promoters).
25.6 Memorandum of
Association
The Memorandum of Association is a document which sets
out the constitution of the company. It defines the scope of the company’s
activities and its relations with the outside world.
Its purpose is to enable shareholders and those who
deal with the company to know what the company is permitted to do.
25.7 Articles of Association
The Articles of Association of a company are its
by-laws or rules and regulations that govern the management of its internal affairs
and the conduct of the business.
25.8 Books of Accounts Maintained
by a Company:
a)
As per
Sec.209 of the Companies Act, 1956, a company must maintain such books to give
true and fair view of the state of affairs of the company. The transaction will
be kept on accrual basis of accounting and will be based on double entry
system.
b)
The books
are to be maintained in respect of:
i.
All
receipts and expenditures of money
ii.
All
Sales and purchase of goods
iii.
All
Assets and Liabilities
iv.
Material,
labour or other items of cost in respect of manufacturing companies.
25.8.1 Financial Statements prepared by the Company:
The company shall lay down- (i) A Balance sheet at the
end of the accounting year, (ii) A Profit & Loss Account or an Income and
Expenditure Account at the end of the accounting year.
Balance sheet should be as per part 1 of Schedule (vi)
and may be in ‘Horizontal’ or ‘Vertical’ format.
