Competitive Exams Corporate Accounting: Profitability Requirement, Shares and Budegting

SEBI Guidlines for determining maximum quantom of bonus issue

First test

Residual reserve test

As per this guidline the residual reserve after the proposal of capitalisation bonus issu should be at least 40% of increased paid up capital

5 Free reserve-2 paid up capital before the bonus issue = 7

2nd test

Profitability requirement test

As per this guidline 30% of average amount of profit before tax in the previous three year should yield a rate of dividend of expended capital base of the company at 10%

= 3 average profit-existing share capital

3rd test

Maximum limit requirement

This test indicates the maximum amount which can be utilised for issue shares capital at one time shall not exceed the total amount of paid up equity capital of the company

Amount of bonus < total existing quity paid up capital

To determine a maximum amount of bonus which can be decleared the test mention above will be apply. Firstly the first two test will be consider the amount of bonus will be restricted upto the lower amount but this amount will not exceed the existing paid up capital of the company.

In brief the following steps should be consider for the purpose of bonus

  1. Bonus shares not permitted in less existing partly paid up shres are converted into fully paid up shares

  2. Bonus can not exist the paid up equity capital of the company

  3. The balance of residual reserve must not less than 40% of increased capital

  4. 30% of average profit before tax of previous 3 year must yield 10% dividend on the increased capital

Accounting treatment of bonus shares

I am giving the full detail of accounting treatment of bonus shares step by step

1st case

When the partly paid up shares are converted into fully paid up shares through bonus issue

  • For providing the amount of bonus out of reserve, then the following journal entry will pass
  • Capital reserve account debit
  • general reserve account debit
  • revenue reserve account debit
  • free reserve account debit
  • dividend equalization fund account debit
  • profit and loss account debit
  • Bonus to equity shareholders account credit
  • For amount due on final call of shares Existing shares unpaid amount
  • Share final call account debit
  • Share capital account credit
  • For adjustment of final call amount out of profit
  • Bonus to shareholder account debit
  • share final call account credit

2nd case

When new fully paid up bonus shares are issued

  • for providing amount of bonus
  • Capital reserve account debit
  • share premium account debit
  • capital redemption reserve account debit
  • other general reserve account debit
  • Profit and loss account debit
  • bonus to shareholder account credit
  • for issue of bonus: Bonus to equity shareholder account debit
  • equity share capital account credit

Calculation the value of bonus shares

Steps for calculation the value of bonus shares

1st step

Take the basis of bonus issue for the purpose of determining for purpose of total amount of bonus basis of bonus issue.

  1. To convert the existing partly paid up shares into fully paid up shares Numbers of existing equity shares X unpaid amount

  2. To determine the number of bonus shares: Bonus shares numbers x Total no. Of issued shares/Basis issue numbers

  3. Amount of new bonus shares = no. Of bonus shares X issue price

Steps of capital budgeting process

Capital budgeting is process of selecting best long term investment project. Capital budgeting is long term planning for making and financing proposed capital out laying

Steps for capital budgeting process

  • Ist step: Identification involved in capital budgeting proposals
  • 2nd step: Screening the proposal
  • 3rd step: Evaluation of various proposals
  • 4th step: Fixing the priorities
  • 5th step: Final approval and planning the capital expenditure
  • 6th step: Implementing the proposal
  • 7th step: Performance review

Terms used in Corporate Accounting

  • Corporate or Company: Corporate or company is the synonym. Company means association of person which do any business for earning profit. But it must register and formed under any company law of any country. Because company is an artificial person and do work with separate entity. Company has its own charter and internal article of association.
  • Shares: This is main term of corporate accounting. When we divide total capital of company into parts then each part is called share. Suppose, if you have 100000 capitals and if you divide into 1000 parts. Then it means company has 1000 shares of 100 rupees each.
  • Preference Shares: Preference shares are the main type of shares if company issues that type of shares, then the share holder of these types of shares has the benefit that they can get part of profit with fixed rate and before giving the part of profit to equity shareholders. In the end of company, these shares are get preference of their repayment.
  • Equity Shares: Equity Shares are the shares which are differ from preference shares. The shareholder of these shares has no preference relating getting dividend or any repayment. They are real owner of company and have the right to give the vote.
  • Dividend: Dividend is that part of profit which distribute among shareholder. Its other name is divisible profit. Dividend may be given by cash or through bonus or any other type.
  • Debenture: Debenture is just paper which is given by company when company takes loan from public. It is issued under company seal. In this paper company accepts that he will repay the loan taken by him after certain period with given rate of interest.
  • Redemption: Redemption is technical term in corporate accounting. It means repayment of loan taken by company. When company issued debenture then company also writes the mode of redemption of debenture. There are different ways of redemption of debenture. The best way is to create sinking fund and keep some part of profit in it as annual installment. So that company can pay his taken loan without any tension.
  • General Reserve: General reserve is the part of retained profit. It is very compulsory to make general reserve in company for payment of contingent liabilities or for development of company. Every finance bill has right to amend or change the rate of % in general reserve. This part is not issued as dividend

Accounting Treatment of issue of shares on premium and discount

Some time a company can decide to issue of shares on premium or on discount. In both situations we must know the basic concept before doing any accounting treatment.

Issue of shares on premium

Issue of shares on premium means that if company wants to get more money of each share. Then the company can demand premium with the face value or nominal value of shares. This is called issue of shares on premium. Suppose if the face value of shares is RS. 100 Company can issue of his 10000 at the rate of Rs. 105 it means company is also demanding RS. 5 per share as premium. According to new amendments in Company law 1956, Company must open security premium account, if co. Issue shares on premium. All money which got with name of premium will transfer to security premium account. The following entry will passed in the books of company

For the due of share Allotment money

  1. Shares Allotment Account Debit xxxx with the total amount Shares Capital Account Credit xxxx With the face value of shares Security Premium Account Credit xxxxWith the amount of premium

  2. For Allotment money Received Bank Account Debit xxxx face value + Premium To Share Allotment Account xxxx If company has demanded the premium with his call money from share holders, then on the place share allotment account we must write share call account, all other journal entry will be same. According to Section 78, We will use this fund according to guidelines of law.

Meaning of Issue of shares at discount

It means that company demands less amount than face value of shares. This less amount is called discount on issue of shares.

Journal entry of discount on issue of shares

When we receive allotment by giving discount on issue of share

1 Amount due of allotment

Share Allotment Account Debit xxxxface value of allotment discount

Discount on issue of share account Debit xxxxamount of discount

  1. When allotment money actually received

To Share capital account

Bank account debit xxxface value of allotment discount

To share allotment account