2.3.4 - Accounting Entries
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Issue of Shares
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Welcome, class! Today, we are going to discuss the issue of shares. Can anyone explain what a share is?
A share is a part of the ownership of a company.
Exactly! Shares indeed represent ownership. Now, can anyone name the two main types of shares?
Equity shares and preference shares.
Correct! Equity shares have variable dividends based on profits, while preference shares offer fixed dividends. Let's also introduce a memory aid: remember 'EPS' - Equity means Profit Sharing, and Preference means Priority in dividends. Now, what do you think is a face value?
The original value of a share?
Great! Let's move on to accounting for shares. When shares are issued at par, one typical journal entry is: 'Bank Account Dr to Share Capital Account'. Can anyone describe what's happening here?
Money is coming into the bank, and the shareholders' equity is increasing.
Well stated! In summary, remember the basics of shares, types, and how to record their issuance. Let's recap: shares can be issued at par, premium, or discount, and we can forfeit and reissue shares. Excellent work today, everyone!
Issue of Debentures
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Now let's switch gears and talk about debentures. Can someone tell me what a debenture is?
It's a loan certificate issued by a company.
You're right! Debentures reflect a debt owed by the company. They come in different types. Can anyone list them?
Convertible, non-convertible, secured, and unsecured debentures.
Correct! Let’s remember that with the acronym 'C UNS' - C for Convertible, U for Unsecured, N for Non-convertible, and S for Secured. Next, how are debentures typically issued?
At par, premium, or discount.
Exactly! Now let’s delve into accounting entries. If a company issues ₹1,00,000 debentures at par, what would be our entry?
Bank Account Dr to 12% Debentures Account.
Fantastic! If it was issued at a 5% discount, what would we do differently? Remember to record the discount as well.
We would debit the Discount on Issue of Debentures Account.
Great job! So the entries will help us manage the company's financial obligations more accurately. To sum up, debentures are crucial for companies seeking to raise capital through loans. Well done!
Redemption of Debentures
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Now, let's discuss the redemption of debentures. Student_1, can you explain what redemption means in this context?
It refers to the repayment of debentures at maturity or before.
Exactly! There are several methods for redemption. Can anyone list a few?
Lump sum payment, installment payment, purchase in the open market, or conversion into shares!
Excellent! Let's remember 'LIPC' - Lump sum, Installments, Purchase, Conversion. When we redeem a debenture, what do we need to account for?
We may need a Debenture Redemption Reserve as well.
Well said! This reserve is necessary to manage future payments appropriately. So, if we redeem debentures at a premium, what's the journal entry we need to consider?
We debit the Premium on Redemption of Debentures Account!
Good catch! Understanding redemption helps ensure companies manage their obligations effectively. Remember this summary: Redemptions can be done in various ways, but planning and recording them accurately is critical. Great session!
Final Accounts of Companies
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Finally, let’s touch on the final accounts of companies. Can anyone tell me which documents are included in the final accounts?
The balance sheet and the statement of profit and loss.
Yes! According to the Companies Act, what key components must be reflected in the balance sheet?
Assets and liabilities, with separate categories for non-current and current assets.
Exactly, remember the phrase 'A Liable Asset' to recollect this! What about the statement of profit and loss? What are its main components?
Revenue, expenses, profit before tax, and profit after tax.
Correct! Now, before finalizing the accounts, what adjustments might we need?
Depreciation, tax provisions, outstanding expenses, and prepaid expenses.
Great job! Let’s summarize - the final accounts prepare stakeholders about the company's performance and position. Remember these adjustments are vital for accuracy. Excellent focus in discussions today!
Introduction & Overview
Read summaries of the section's main ideas at different levels of detail.
Quick Overview
Standard
Accounting Entries in joint stock companies include the procedures for issuing shares at par, premium, or discount, as well as the accounting treatment for debentures issuance and redemption. Understanding these entries is crucial for accurate financial reporting and compliance with statutory requirements.
Detailed
Detailed Summary
In joint stock companies, accounting entries for shares and debentures play a significant role in the financial reporting process. The section highlights the following key points:
- Issue of Shares: Companies can issue equity and preference shares. Equity shares have variable dividends based on profits, while preference shares offer fixed dividends with priority in payment.
- Types of Shares:
- Equity Shares: No fixed dividend, dividend based on company profit.
- Preference Shares: Fixed rate of dividend, priority over equity shareholders.
- Basic Terms include face value, issue price, and calls.
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Accounting for Issuance:
- At Par: Journal entries for shares issued at face value include transactions for application and allotment.
- At Premium: Entries must credit a securities premium account reflecting excess over face value.
- Forfeiture and Reissue: Shares can be forfeited for unpaid calls and can be reissued, potentially at a discount.
- Issue of Debentures: Debentures represent long-term loans to companies.
- Types include convertible, non-convertible, secured, and unsecured debentures.
- They can be issued at par, premium, or discount.
- Accounting Entries for issued debentures demonstrate the financial impact of their issuance based on the discount or premium provided.
- Redemption of Debentures: The repayment method of debentures can be lump-sum, installment, or by purchase in the market. Companies must also establish a Debenture Redemption Reserve (DRR) for sustainability in repaying these loans.
- Journal Entries for Redemption: These depend on repayment terms, with different accounting actions when a premium applies.
- Final Accounts of Companies: Final accounts consist of the balance sheet and statement of profit and loss, as mandated by the Companies Act 2013, with specified formats and sections for assets, liabilities, and income adjustments.
Understanding accounting entries related to shares and debentures is essential for accurately managing company finances and adhering to legal standards in the corporate environment.
Audio Book
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Accounting Entries for Issued Debentures
Chapter 1 of 2
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Chapter Content
Example: Issued ₹1,00,000 12% Debentures at par
cssCopyEditBank A/c Dr. ₹1,00,000
To 12% Debentures A/c ₹1,00,000
If issued at a discount of 5%:
cssCopyEditBank A/c Dr. ₹95,000
Discount on Issue of Debentures A/c Dr. ₹5,000
To 12% Debentures A/c ₹1,00,000
Detailed Explanation
This section outlines how to record the accounting entries when a company issues debentures. When debentures worth ₹1,00,000 are issued at par, the company records the full amount received in the Bank Account and credits the Debenture Account with the same amount. If the debentures are issued at a discount, say 5%, the company only receives ₹95,000 in cash. The discount amount of ₹5,000 is recorded separately in a 'Discount on Issue of Debentures' account, which helps track the total discount offered on these financial instruments.
Examples & Analogies
Imagine a company selling tickets for a concert. If a ticket priced at ₹100 is sold for ₹100, the company records exactly what it received. But if it sells the ticket for ₹95 to attract more buyers, the company not only notes down the income received but also mentions that ₹5 was the discount offered to encourage sales.
Accounting Entries when Issuing Debentures at Discount
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Chapter Content
If issued at a discount of 5%:
cssCopyEditBank A/c Dr. ₹95,000
Discount on Issue of Debentures A/c Dr. ₹5,000
To 12% Debentures A/c ₹1,00,000
Detailed Explanation
The entry illustrates how to manage a discount on debentures effectively. The company receives ₹95,000 in cash, shown in the Bank Account, indicating actual cash inflow. The difference of ₹5,000, which reflects the discount, is noted as 'Discount on Issue of Debentures.' This separate account tracks the total amount discounted for future analysis, ensuring that the books accurately depict the financial position.
Examples & Analogies
Think of this situation as a store running a sale. If a product worth ₹100 is sold at a discounted price of ₹95, the store knows it has made ₹95, and the ₹5 less it got can be viewed as a sales strategy or promotion, helping to attract customers, which is noted down for evaluating the effectiveness of the sales strategy later.
Key Concepts
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Types of Shares: Equity and Preference shares serve different financial roles within a company.
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Debentures: Represent borrowing by a company and can be issued under various conditions.
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Accounting Entries: Correct entries are essential for reflecting accurate financial conditions.
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Redemption Methods: Various strategies can be employed to repay debentures.
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Final Accounts: Required for statutory compliance and providing insights into company performance.
Examples & Applications
Example of issuing equity shares at par: Company issues 10,000 shares at ₹10 each. Journal: Bank A/c Debited ₹100,000, Share Capital A/c Credited ₹100,000.
Example of debentures issued at a discount: ₹1,00,000 12% debentures issued at a 5% discount. Journal: Bank A/c Debited ₹95,000, Discount on Issue of Debentures A/c Debited ₹5,000.
Memory Aids
Interactive tools to help you remember key concepts
Rhymes
In stock we hold a share, Earnings uncertain, we all share. Preference brings fixed, with fewer cares.
Stories
Once a company needed funds, it decided to issue shares. Some investors preferred security and chose preference shares, while others took risks with equity. They shared the company’s success or burden together.
Memory Tools
Remember the acronym 'DICE' for debentures - Debt Issued with Comprehensive Entries.
Acronyms
Use 'PAR' - Payment At Redemption, to remember how to redeem debentures.
Flash Cards
Glossary
- Equity Shares
Shares without a fixed dividend, offering variable dividends based on company profit.
- Preference Shares
Shares that provide fixed dividends and priority payments over equity shares.
- Face Value
The original value or nominal value of a share as stated on the share certificate.
- Issue Price
The price at which shares are actually offered to the public, can be at par, premium, or discount.
- Debenture
A certificate acknowledging a loan made to a company, repayable at a future date.
- Redemption
The process of repaying the amount due on debentures to the holders.
- Debenture Redemption Reserve (DRR)
A reserve created for the specific purposes of redeeming debentures to ensure financial stability.
- Balance Sheet
A financial statement showing the company’s assets, liabilities, and equity at a given time.
- Statement of Profit and Loss
A financial statement summarizing revenues, costs, and expenses incurred during a specific period.
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