*Module 3.Recording Financial TransationDr. Varadraj Bapat

Dr. Varadraj Bapat*IndexCorporate AccountingShare Capital and its typesIssue of share capitalDebentures issue and redemption and purchase of own debentures

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Dr. Varadraj Bapat*IndexCorporate AccountingThis file discusses various entries which are peculiar to companies.

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Dr. Varadraj Bapat*Corporate AccountingShare CapitalTotal capital of the company is divided into a number of small indivisible units of a fixed amount and each such unit is called a share.As the total capital of the company is divided into shares, the capital of the company is called share capital.

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Dr. Varadraj Bapat*The fixed value of a share, printed on the share certificate is called nominal/ par/ face value of a share.A company can issue shares at a price different from the face value of a share; this is issue price of share.Types of sharesShares issued by a company are divided into two categories:

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Dr. Varadraj Bapat*Preference Shares:The shares which are assured of preferential dividend at a fixed rate during the life of company and carry a preferential right over other shareholders to be paid first in case of winding up of company.Equity Shares:Equity shares are those shares, which are not preference shares. It means that they do not enjoy

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Dr. Varadraj Bapat*any preferential rights in the matter of payment of dividend or repayment of capital.Issue of share capitalThe shares can be issued by company either for cash or for the consideration other than cash.A public company issues a prospectus inviting general public to subscribe for its shares. On the basis of prospectus, application

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Dr. Varadraj Bapat*are deposited in a scheduled bank by the interested parties along with the amount payable at the time of application in cash which is called as application money. Company reserves the right to reject or accept an application fully or partially. Successful applicants become shareholders of the company and are required to pay the second installment which is known as allotment money.

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Dr. Varadraj Bapat*Subsequent installments, if any, to be called by the company are known as calls.Journal Entries for issues of shares for cash

1.On the receipt of the application moneyBank A/c Dr.To Shares Application money

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Dr. Varadraj Bapat*2.On the allotment of shareShare Allotment A/c..Dr.Share Application A/cDr.To Share Capital A/cTo Securities Premium A/c(if shares are issued at premium)

3.On the receipt of allotment moneyBank A/c..Dr.To Share Allotment A/c

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Dr. Varadraj Bapat*4.On the call being madeShare call A/c..Dr.To Share Capital A/c

5. On receipt of call moneyBank A/cDr.To Share Call A/c

6. If call money is received from shareholders even before making call

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Dr. Varadraj Bapat*Bank A/c.Dr.To Calls in Advance A/c

7. If money is not received from shareholders on any callCalls in Arrears A/c.Dr.To Share Allotment A/cTo Share Call A/c

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Dr. Varadraj Bapat*The Articles of Association of a company usually empower the director to charge interest at a stipulated rate on calls in arrears. According to Table A of Companies Act 1956 interest at the rate of 5% p.a. is to be charged on unpaid calls from the due date of the call up to the actual payment.

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Dr. Varadraj Bapat*JE for interest receivable on call in arrearsShareholders A/c.Dr.To Interest on Calls in Arrears A/cFor receipt of interest Interest on Calls in Arrears A/cDr.Shareholders A/c

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Dr. Varadraj Bapat*According to Table A of Companies Act 1956 interest at the rate of 6% p.a. is to be paid on calls in advance from the actual payment up to due date of the call. JE for Interest due Interest on Calls in Arrears A/cDr.To Shareholders A/c

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Payment of interest Shareholders A/c Dr.Interest on Calls in Advance A/c

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Dr. Varadraj Bapat*DebenturesIssuing debt instruments by offering the same for public subscription is one of the sources of financing the business activities. Debt financing does not only help in reducing the cost of the capital but also helps in designing appropriate capital structure of the company.

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Dr. Varadraj Bapat*Debenture is one of the most commonly used debt instrument issued by the company to raise funds for the business.A debenture/ bond is the a security issued by the company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest.

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Dr. Varadraj Bapat*Issue of debentures can be categorized into the following:Debenture issued at par and redeemable at par or at a discountDebenture issued at discount and redeemable at par or at a discountDebenture issued at premium and redeemable at par or at a discountIssue of debentures

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Dr. Varadraj Bapat*Debenture issued at par and redeemable at premiumDebenture issued at a discount and redeemable at premium

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Dr. Varadraj Bapat*Journal Entries in each of the above cases are discussed below:1. Debenture issued at par and redeemable at par or at a discountFor receipt of application money:Bank A/cDr.To Debenture ApplicationMoney A/c

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Dr. Varadraj Bapat*For transfer of application money to debenture account: Debenture Application A/cTo Debenture A/c

2.Debenture issued at discount and redeemable at par or at a discountFor receipt of application money:Bank A/cDr.To Debenture Application Money A/c

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Dr. Varadraj Bapat*For transfer of application money to debenture account: Debenture Application A/cTo Debenture A/c

3.Debenture issued at discount and redeemable at par or at a discountFor receipt of application money:Bank A/cDr.To Debenture Application Money A/c

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Dr. Varadraj Bapat*For transfer of application money to debenture account: Debenture Application A/cDiscount on issue of debenture A/cTo Debenture A/c

4.Debenture issued at premium and redeemable at par or at a discountFor receipt of application money:Bank A/cDr.To Debenture Application Money A/c

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Dr. Varadraj Bapat*For transfer of application money to debenture account: Debenture Application A/cTo Debenture A/c To Securities premium A/c5.Debenture issued at par and redeemable at premiumFor receipt of application money:Bank A/cDr.To Debenture Application Money A/c

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Dr. Varadraj Bapat*For transfer of application money to debenture account: Debenture Application A/c To Debenture A/cCall made consequent upon allotment:Debenture Allotment A/cLoss on issue of Debenture A/cTo Debenture A/cTo Debenture redemption Premium A/c

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Dr. Varadraj Bapat*6.Debenture issued at a discount and redeemable at premiumFor receipt of application money:Bank A/cDr.To Debenture Application Money A/cFor transfer of application money to debenture account: Debenture Application A/cTo Debenture A/c

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Dr. Varadraj Bapat*Call made consequent upon allotment:Debenture Allotment A/cDiscount /Loss on issue of Debenture A/c(Discount + premium on redemption)To Debenture A/cTo Debenture redemption Premium A/c

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7.Debenture issued at a premium and redeemable at premiumFor receipt of application money:Bank A/cDr. To Debenture Application Money A/cFor transfer of application money to debenture account: Debenture Application A/cTo Debenture A/c

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Call made consequent upon allotment:Debenture Allotment A/cLoss on issue of Debenture A/c(amount equal to premium on redemption)To Debenture A/cTo Debenture redemption Premium A/c

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Dr. Varadraj Bapat*Redemption of debentures can be categorized into the following:Debenture issued at par and redeemable at parDebenture issued at discount and redeemable at parRedemption of debentures

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Dr. Varadraj Bapat*Debenture issued at premium and redeemable at parDebenture issued at par and redeemable at premiumDebenture issued at a discount and redeemable at premiumDebenture issued at a premium and redeemable at premium

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Dr. Varadraj Bapat*Journal Entries in each of the above cases are discussed below:1. Debenture issued at par and redeemable at par

-Closing debenture accountDebenture A/cDr.To Debenture holders A/c

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Dr. Varadraj Bapat*-For payment of money to debenture holders: Debenture holders A/cTo Bank A/c

2.Debenture issued at discount and redeemable at par-For transfer of loss of discount to profit & loss account:Profit & Loss A/cDr.To Discount on issue of debenture A/c

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Dr. Varadraj Bapat*the above entry may be repeated during the tenure of the debenture for writing off proportionate discount every year. -Closing debenture accountDebenture A/cDr.To Debenture holders A/c

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Dr. Varadraj Bapat*-For payment of money to debenture holders: Debenture holders A/cTo Bank A/c

Debenture issued at premium and redeemable at par-Closing debenture accountDebenture A/cDr.To Debenture holders A/c

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Dr. Varadraj Bapat*-For payment of money to debenture holders: Debenture holders A/cTo Bank A/c

Debenture issued at par and redeemable at premium-For transfer of loss of premium to profit & loss account:

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Dr. Varadraj Bapat*Profit & Loss A/cDr.To Loss on issue of debenture A/c the above entry may be repeated during the tenure of the debenture for writing off proportionate premium to be paid on redemption every year.

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Dr. Varadraj Bapat*-Closing debenture and premium accountDebenture A/cDr.Debenture redemption Premium A/cDr. To Debenture holders A/c-For payment of money to debenture holders: Debenture holders A/cTo Bank A/c

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Dr. Varadraj Bapat*Debenture issued at a discount and redeemable at premium-For transfer of loss of discount and premium to profit & loss account:Profit & Loss A/cDr.To Discount / Loss on issue of debenture A/c(Discount + Premium)

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Dr. Varadraj Bapat*-Closing debenture and premium accountDebenture A/cDr.Debenture redemption Premium A/cDr. To Debenture holders A/c-For payment of money to debenture holders: Debenture holders A/cTo Bank A/c

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Dr. Varadraj Bapat*Debenture issued at a premium and redeemable at premium-For transfer of loss of discount to profit & loss account:Profit & Loss A/cDr.To Loss on issue of debenture A/c(Premium on redemption)

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Dr. Varadraj Bapat*-Closing debenture and premium accountDebenture A/cDr.Debenture redemption Premium A/cDr. To Debenture holders A/c-For payment of money to debenture holders: Debenture holders A/cTo Bank A/c

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Dr. Varadraj Bapat*Debentures sometime are purchased in an open market and then cancelled on due date.Example,Company has issued 1000 9 % debentures for Rs. 100000. interest being payable half yearly. The company purchasesPurchase of debenture

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Dr. Varadraj Bapat*100 debentures at Rs. 98 per debenture cum interest (interest for 6 months). Journal Entries:Own Debenture A/c.Dr. 9350Interest A/c.Dr. 450To Bank 9800

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Dr. Varadraj Bapat*Suppose out of these debentures 40 debentures sold at Rs. 102 ex interest and remaining are cancelled at the end of 6 months from date of purchase.Journal EntriesBank A/cDR.4080To Own Debentures 4080To Interest A/c 60

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Dr. Varadraj Bapat*Own Debentures A/cDR.340To Profit & Loss 340(Profit on sale transferred to P & L A/c)At the end of 6 months9% debentures A/c.Dr.6000To Own Debenture 5610To Capital Reserve390(Profit on cancellation transferred)

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