| TOPIC 1 |

FEATURES AND CLASSIFICATION OF COMPANIES

Meaning and Definition of Company

A company is a type of business structure that is a separate legal entity from
its owners.
“A Company is an artificial person created by law, having separate legal
entity with a perpetual succession and a common seal.” Definition given by
Prof. Haney
Features/Characteristics of a Company
(1) The certificate of incorporation of a company is issued by registrar of
companies as per procedure/guidelines given in the Companies Act, 2013.
The law considers a company as an artificial legal person.
(2) A company is a separate legal entity from its owner (shareholders).
(3) A company has perpetual existence, not affected by the death, lunancy or
insolvency of its shareholders. It can be wounded up only by the law (court
or registrar of company).
(4) Every company has it own common seal, which act as the official signature
of the company.
(5) The shares of a company is transferable subject to certain conditions (e.g.
some conditions for private company).
(6) The company is managed by the ‘Board of Directors’, the directors are
representative of the shareholders (owners). So, management and
ownership are separate in company form of organisation.
(7) The liability of a shareholder is limited upto the nominal price of shares
subscribed by one.
Classification of Companies
Companies can be classified on the basis of:
(1) Liability: It refers to the personal liability of members to pay for the debts
incurred by the company.
Different categories of companies under this form are:
(i) Limited Liability Company or Company Limited by Shares: A
company in which the liability of the members is restricted to the
unpaid value of the shares held by them. If a share holder has paid the
complete amount of shares, there is no liability on his side, whatever
may be the debts of the enterprise.
(ii) Unlimited Liability Company: It is a company where the liability of its
members is unlimited. It means, in the event of winding up, the debts of

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 the company can be met from the private property of the members.
(iii)Company Limited by Guarantee: It is a company in which the liability
of the members is restricted to the amount they have guaranted to pay
in the event of compnay being wound up.
Note: All companies do not have share capital. Only companies limited by
shares have share capital.
(2) Transferability of shares:
(i) Private Company: Section 2 (68) of the Companies Act, 2013 defines
“A private Company means a company which has a minimum paid up
capital of ` 1,00,000 and which by its Articles of Association:
• restricts the right to transfer its shares;
• limits the number of its members to 200 excluding its part or present
employee members;
• Prohibits any invitation to public to subscribe for any of its securities.
(ii) Public Company: According to section 2 (71) of the Companies Act,
2013 a public company means a company which:
• is not a private company
• has a minimum paid up capital of ` 5,00,000 or higher capital as may
be prescribed
• is a subsidiary of a company not being a private company.
(iii)One Person Company: Section 2 (62) of the Companies Act, 2013
states one person company is a company which has only one person
as a member. Rule 3 of the Companies. (Incorporation) Rules, 2014
provides that:
• Only an Indian citizen resident in India can form one person company.
• Its paid up capital is not more than 50 lakhs;
• Its average annual turnover should not exceed ` 2 crores;
• It cannot carry out non-banking financial investment activities.
Preliminary Expenses
The expenses incurred in the promotion and formation of the company are
known as preliminary expenses such as registration fee paid to registrar of
the companies, stamp duty, legal expenses, expenses regarding preparation
and issue of prospectus, etc.
Preliminary expenses are written-off in the year in which they are incurred.
Preliminary expenses are also known as incorporation expenses, promotion
expenses and formation expenses.
Example 1. What do you mean by a listed company?
Ans. Listed company refers to the company which is listed and recognised

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 by the National Stock Exchange or the Bombay Stock Exchange. In other

..
words, when the stock exchange of the country recognise the existence
of the company, it is known to be listed. Listed companies have the
responsibility to adhere to the requirements of the stock exchange.

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 OBJECTIVE Type Questions
[ 1 mark ]
Multiple Choice Questions
1. Jyoti Limited forfeited 800 shares of ` 10 each for non payment of
final call of ` 3 per share. The forfeited shares were issued at ` 12 per
share. Calculate the amount of capital reserve.
(a)` 4,600 (b)` 5,600
(c)` 2,600 (d)` 3,600 [DIKSHA]
Ans. (b)` 5,600
Explanation: As the shares are reissued at premium, nothing is debited
to Share Forfeiture A/c (800 × ` 7 = ` 5,600)
2. In which of the following situation Companies Act, 2013 allows for
issue of shares at discount?
(a)Issue to vendors
(b)Issue to public
(c)Issue as sweat equity
(d)None of these[CBSE SQP Term-1 2021]
Ans. (c) Issue as sweat equity
[CBSE Marking Scheme SQP Term-1 2021]
Explanation: According to Section 2(88) of the Companies Act, 2013, sweat
equity shares are shares issued by a company to its directors or employees
for non-cash consideration or at a discount for making rights available in
the nature of intellectual property right or providing know how or providing
value additions in any form.

Assertion-Reason Questions
For the following questions, two statements are given: One labelled
Assertion (A) and the other labelled Reason (R). Select the correct answer
to these questions from the codes (a), (b), (c) and (d) as given below:
(a) (A) is correct but (R) is wrong.
(b) Both (A) and (R) are correct, but (R) is not the correct explanation of
(A).
(c) Both (A) and (R) are incorrect.
(d) Both (A) and (R) are correct, and (R) is the correct explanation of (A).
3. Assertion (A):The Equity shareholders are paid dividend on the shares
held by them.
Reason (R): As equity shareholders are the owners, dividend form

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 there earning.
Ans. (d)Both (A) and (R) are correct, and (R) is the correct explanation of (A)
Explanation: Equity shareholders are paid on the basis of earnings of the
company and do not get a fixed dividend.
Related Theory
 Equity shareholders are referred to as 'residual owners'. They receive
what is left after all other claims on the company's income and assets
have been settled.

CASE BASED Questions (CBQs)

[ 2 & 4 marks ]
4. Vinod Ltd. having authorised capital ` 1,00,00,000 divided into equity
shares of ` 100 each, invited applications for issuing 25,000 equity shares
at par. The amount per share was payable as follows : On application `
20 per share, on allotment ` 30 per share, on first call ` 25 per share
and on second and final call ` 25 per share. Aplications were received for
24,000 shares and the shares were allotted to all the applicants. All calls
were made and were received as follows:
On 18,000 shares — Full amount;
On 2,000 shares— ` 75 per share;
On 2,500 shares—` 50 per share;
On 1,500 shares—` 20 per share
The company forfeited those shares on which less than ` 75 per share
were received. The forfeited shares were reissued at ` 95 per share fully
paid up.
(A)How much amount was received on allotment?
(a) ` 6,75,000 (b) ` 7,20,000
(c) ` 6,00,000 (d) ` 4,80,000
(B)How much total amount was credited to Share Forfeiture Account
on forfeiture of shares?
(a) ` 3,80,000 (b) ` 1,35,000
(c) ` 1,55,000 (d) ` 2,45,000
[CBSE Term-1 2021]
Ans. (A) (a)` 6,75,000
(B) (c)` 1,55,000

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 VERY SHORT ANSWER Type Questions (VSA)
[ 1 mark ]

5. Zoyo Ltd. forfieted 700 shares of ` 10 each (` 9 called up) on which

amount paid is ` 7 per share. Out of these 200 shares were re-issued
at ` 9 fully paid up. Calculate the amount credited to Share Capital
Account at the time of reissue ? [DIKSHA]
Ans. Since, 200 shares are reissued at ` 9 but as fully paid up, therefore, the
amount to be credited to share capital account at the time of reissue will
be as follows:
Share Capital = 200 × ` 10 = ` 2,000.
As 200 shares are reissued @ ` 9 fully paid up. Hence, share capital will
be credited with ` 2000.
6. Is Reserve capital a part of unsubscribed capital or uncalled Capital?
[CBSE 2018]
Ans. Reserve capital is a part of uncalled capital.

SHORT ANSWER Type-I Questions (SA-I)

[ 3 marks ]

7. Distinguish between oversubscription and undersubscription of

shares issued by a company. How is oversubscription dealt with ?
[CBSE 2004]
Ans. Difference between oversubscription of shares and undersubscription of
shares are as follows:
Basic Oversubscription of shares Undersubscription of
shares
Shares Number of shares applied is Number of shares applied
applied more than the shares offered is less than the shares
for subscription. offered for subscription.
Acceptance All applications are not All the applications for
accepted. Some are rejected. shares are accepted i.e.
Alternatively, shares are full allotment is made.
allotted on pro-rata basis.

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 Refund Excess application money As all the applications
is refunded or adjusted are accepted, there is
towards allotment and calls. no excess money to be
refunded.
Minimum A company does not face A company may face
subscription such a problem. the problem of minimum
subscription

SHORT ANSWER Type-II Questions (SA-II)

[ 4 marks ]

8. Vodafone Ltd. issued 50,000 shares of ` 10 each. The amount due was
received except on 1000 shares on which ` 6 shares was received.
These shares were forfeited and 700 shares were reissued for ` 8
each fully paid up.
Show Forfeiture account and Balance sheet at closely date.

Ans. Vodafone Ltd.

Dr. Forfeited shares account Cr.
Amount Amount
Particulars Particulars
` `
To Share capital 1,400 By Share Capital 6,000
To Capital Reserve 2,800
To Balance c/d 1,800
6,000 6,000

Balance Sheet
Vodafone Ltd.
As at………….
Particulars Note Amount
No. (`)
I. Equity and Liabilities
1. Shareholders's Fund
(a) Share Capital 3 4,98,800
(b) Reserve & Surplus 2 2,800

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 Total 5,01,600
II. Assets
Current Assets
Cash and Cash Equivalents 5,01,600
Total 5,01,600
Working Notes:

(1)
Date Particulars L.F. Debit (`) Credit (`)
Share capital A/c 10,000
Dr. 4,000
To calls in Arrear A/c 6,000
To forfeited Share A/c
Bank A/c Dr. 5,600
Forfeited share A/c Dr. 1,400
To Share capital A/c 7,000

(2) Calculation of Capital Reserve

Amount forfeited on 700 Shares = 700 × 6 = ` 4,200
Less: Discount on issue (700 × 2) = ` 1,400
Gain on reissue (Capital Reserve)` 2,800

(3) Share Capital

49,700 Shares × 10 = 4,97,000
Add: Forfeited Shares A/c 4,800

4,98,800

LONG ANSWER Type Questions (LA)

[ 6 marks ]

9. A Ltd. invited applications for issuing 1,00,000 shares of ` 10 each at

a premium of ` 1 per share. The amount was payable as follows :
On application ` 3 per share
On allotment ` 3 per share (including premium)
On first call ` 3 per share
On second and final callBalance amount

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 Applications for 1,60,000 shares were received. Allotment was made
on the following basis:
(i)To applicants for 90,000 shares 40,000 shares
(ii)To applicants for 50,000 shares 40,000 shares
(iii)To applicants for 20,000 shares Full shares
Excess money paid on application is to be adjusted against the
amount due on allotment and calls.
Rishabh, a shareholder, who applied for 1,500 shares and belonged
to category (ii) did not pay allotment, first and second and final call
money. Another shareholder, Sudha, who applied for 1,800 shares
and belonged to category (i) did not pay the first and second and
final call money.
All the shares of Rishabh and Sudha were forfeited and were
subsequetly re-issued at ` 7 per share fully paid.
Pass the necessary journal entries in the books of A Ltd. Open calls-
in-arrears account and calls-in-advance account wherever required.
[CBSE 2018]

Ans. Journal
Date Particulars L.F. Debit (`) Credit (`)
Bank A/c (1,60,000 × 3) Dr. 4,80,000
To Equity Share Application A/c 4,80,000
(Being application money received)
Equity Share Application A/c Dr. 4,80,000
To Equity Share Capital A/c 3,00,000
To Equity Share Allotment A/c 1,50,000
To Calls-in-advance A/c 30,000
(Being application money transferred
to share capital account)
Equity Share Allotment A/c Dr. 3,00,000
To Equity Share Capital A/c 2,00,000
To Securities Premium Reserve A/c 1,00,000
(Being allotment money due)
Bank A/c Dr. 1,47,300
Calls-in-arrears A/c Dr. 2,700
To Equity Share Allotment A/c 1,50,000
(Being allotment money received
except on 1,200 shares)

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 Equity Share First Calls A/c Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(Being first call money due)
Bank A/c Dr. 2,64,000
Calls-in-advance A/c Dr. 30,000
Calls-in-arrears A/c Dr. 5,400
To Equity Share First Call A/c 3,00,000
(Being first call money received)
Equity Share Second and Final
Call A/c Dr. 2,00,000
To Equity Share Capital A/c 2,00,000
(Being second and final call money
due)
Bank A/c Dr. 1,96,000
Calls-in-arrears A/c Dr. 4,000
To Equity Share Second and Final 2,00,000
Calls A/c
(Being second and final call money
received)
Share Capital A/c Dr. 20,000
Securities Premium Reserve A/c Dr. 1,200
To Calls-in-arrears 12,100
To Share Forfeiture A/c 9,100
(Being shares forfeited)
Bank A/c Dr. 14,000
Share Forfeited A/c Dr. 6,000
To Share Capital A/c 20,000
(Being forfeited share re-issued)
Share Forfeited A/c Dr. 3,100
To Capital Reserve A/c 3,100
(Being Balance of Forfeited account
transferred to capital reserve)

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 Working Notes:
Money Money Money
Shares Shares Received on transferred received on
Applied Allotted Application to share allotment @
@`3 capital `3
90,000 40,000 2,70,000 1,20,000 1,20,000
50,000 40,000 1,50,000 1,20,000 30,000
20,000 20,000 60,000 60,000 —
1,60,000 1,00,000 4,80,000 3,00,000 1,50,000
(1)Calculation of Calls-in-arrears on Rishbah's Shares `
Allotment due (1,200 × 3) = 3,600
(–) Excess on application (1,500 – 1,200) × 3 = (900)
2,700

(2)Calculation of Calls-in-arrears on First Call `

Amount due (2,000 × 3) = 6,000
( – ) Excess on application money
adjusted on allotment = 6,00
(1,800 – 800) × 3 – 2,400 = 5,400
(3) Calculation of Amount Forfeited `
Rishabh (1,500 × 3) 4,500
Sudha (1,800 × 3) 5,400
( – ) Excess adjusted (800) 4,600
Total amount forfeited 9,100

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