Company Final Accounts Basics: Share Capital and Simple Financial Statements Questions

Q: Pass journal entry for issue of equity shares for cash (basic).

Bank A/c Dr.\n\tTo Equity Share Capital A/c\n(Being issue of equity shares for cash).

Question 1

Define a company.

Accepted Answer

A company is an artificial legal person created by law with a separate legal identity distinct from its members.

Question 2

What is share capital?

Accepted Answer

Share capital is the amount of capital raised by a company by issuing shares to shareholders.

Question 3

Define authorised capital.

Accepted Answer

Authorised capital is the maximum amount of share capital that a company is permitted to raise as per its memorandum.

Question 4

What are equity shares?

Accepted Answer

Equity shares are shares carrying voting rights and residual claim on profits and assets after other claims are met.

Question 5

What are preference shares?

Accepted Answer

Preference shares are shares that have preferential right to dividend and repayment of capital over equity shares.

Question 6

What is dividend?

Accepted Answer

Dividend is the portion of profit distributed by a company to its shareholders.

Question 7

Explain features of a company.

Accepted Answer

Important features of a company are: (i) **separate legal entity**—company is distinct from its shareholders; (ii) **limited liability**—members’ liability is limited to unpaid amount on shares; (iii) **perpetual succession**—company continues irrespective of changes in membership; and (iv) **transferability of shares** (in a public company), which allows ownership to change without affecting existence of the company.

Question 8

Differentiate between equity shares and preference shares.

Accepted Answer

Equity shares carry voting rights and dividend is not fixed; equity shareholders get dividend after preference dividend and bear higher risk with potential higher return. Preference shares generally carry a fixed rate of dividend and have preferential right to dividend and repayment of capital, but usually have limited voting rights. Thus, equity is residual ownership, while preference is preferential but less risky.

Question 9

Explain different types of share capital.

Accepted Answer

Share capital may be classified as: **authorised capital** (maximum allowed), **issued capital** (part offered to public), **subscribed capital** (part subscribed by public), **called-up capital** (amount called by company), and **paid-up capital** (amount actually received from shareholders). This classification helps understand how much capital is legally permitted, offered, demanded and collected.

Question 10

Pass journal entry for issue of equity shares for cash (basic).

Accepted Answer

Bank A/c Dr.
	To Equity Share Capital A/c
(Being issue of equity shares for cash).

Question 11

Explain meaning of called-up and paid-up capital.

Accepted Answer

Called-up capital is that part of subscribed capital which the company has demanded (called) from shareholders. Paid-up capital is the portion of called-up capital actually received from shareholders. If some shareholders do not pay, the unpaid amount is called calls in arrears.

Question 12

Write a short note on reserves and surplus in a company.

Accepted Answer

Reserves and surplus represent retained profits of the company and certain capital reserves (e.g., securities premium). They strengthen shareholders’ funds and appear under shareholders’ funds (equity) in the balance sheet along with share capital.

Question 13

Explain share capital and its classification in detail.

Accepted Answer

Share capital is the amount raised by a company by issuing shares. It is shown under shareholders’ funds in the balance sheet and represents ownership financing. Share capital is commonly classified as: (1) **Authorised capital**—the maximum capital permitted by memorandum; (2) **Issued capital**—the part of authorised capital offered to the public; (3) **Subscribed capital**—the part taken up by shareholders; (4) **Called-up capital**—the amount demanded by the company from shareholders; and (5) **Paid-up capital**—the amount actually received. This classification explains the flow from legal permission to funds actually collected.

Question 14

Explain equity shares and preference shares with their rights and differences.

Accepted Answer

Equity shares are ownership shares. Equity shareholders generally have voting rights, dividend is not fixed and depends on profits, and they have a residual claim on profits and assets after all other claims are met. Preference shares carry preferential rights: priority in dividend (often fixed rate) and priority in repayment of capital at winding up. Preference shareholders usually have limited voting rights. Thus, equity involves higher risk and potentially higher return with control, while preference involves priority but limited control and usually fixed return.

Question 15

Explain basic final accounts of a company and show a simple balance sheet structure.

Accepted Answer

Company final accounts include the Statement of Profit and Loss (showing revenue, expenses and profit for the period) and the Balance Sheet (showing financial position). The balance sheet broadly presents **Equity and Liabilities** and **Assets**. Under equity, companies show shareholders’ funds such as equity share capital and reserves & surplus (retained earnings). Liabilities are classified into non-current (long-term borrowings) and current (trade payables, short-term provisions). Assets are classified into non-current (property, plant and equipment) and current (inventory, trade receivables, cash and bank). This structure shows how the company is financed and where funds are invested.

Company Final Accounts Basics: Share Capital and Simple Financial Statements

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