Last Updated on: 5th July 2024, 01:43 pm
Company Accounts Introduction
Company Accounts
Company form of organization is one of the ingenious creations of human mind, which has enabled the business to carry on its wealth creation activities through optimum utilization of resources. It represents different kind of associations, in terms of its construction, business and legal implications.
The word ‘Company’ derived from the Latin word ‘com’ means (with or together) and ‘panis’ (means bread). In law, it refers to a company formed and registered under The Companies Act, 1956 or some earlier similar acts. A company may be an incorporated, or a corporation, or an unincorporated company. An incorporated company is an artificial person whereas an unincorporated company is a group of person like partnership.
In legal terms, a company means “a company formed and registered under Companies Act,1956 or any Companies Act enacted prior to that”.
Characteristics of a Company
The following are some of the special attributes of a Company, in terms of Financial & Accounting matters :
- Separate Legal Entity: A company is regarded as an entity separate from its members and has an independent corporate existence. For example, Gupta & Co. is an entirely different person from Mr Gupta, even if he holds practically all the shares in the company. The company’s property is not the property of Mr Gupta.
- Limited Liability: In limited liability company, the liability of member is limited, by share or guarantee. For example, if face value of a share in a company is Rs.10 and a shareholder paid Rs.5 per share, he can be called to pay not exceeding Rs.5 per share during the life time of the company, as his liability is limited by share.
- Perpetual Succession: Perpetual Succession denotes the ability of a company to maintain its existence by the constant succession of new individuals who step into the shoes of those who cease to be members of the company.
The death or insolvency of any shareholder (or even all of them) does not affect the life of a company. For example, if all the members of a private company die in an accident, the company still remains alive.
A company, an abstract and artificial person, does not die natural death. Existence of a company is terminated by winding up (or through reconstruction, amalgamation etc).
- Transferability of Shares: The capital of a company is divided into shares. These shares, subject to certain conditions, are freely transferable. A member can realise the invested money by selling his shares in the open market. The stock market provides adequate facilities to purchase or sale of shares.
- Periodic Audit: The accounts of company get periodically audited through chartered accountants appointed by the shareholders on the recommendation of board of directors.
Company vs Partnership
The key difference between Company and Partnership may be enumerated as follows :
| Basis of Difference | Company | Partnership |
| Legal Status | A company is a distinct legal person from its members as it is created by law. | Partnership is not distinct from its members (partners) who form the partnership firm. |
| Property | The property of a company is not the property of the individual members. | In partnership firm, the partners are the joint owners of the firm property. |
| Status of Creditors | The creditors of a company are not creditors of its members. | Creditors of partnership firms are creditors of individual partners. |
| Agency | Members of a company are not agent of company. They cannot dispose of property of Company. | Partners are the agents of a firm. They can dispose of property of the Firm |
| Contract | A member of a company can contract with the company. | A partner can not contract with his firm. |
| Transfer of ownership | A member can sell his shares in the open market. | A partner can not transfer his share without the consent of other partners. |
| Management | A company is administered and managed by its managerial personnel and members have no right to take part in the management. | Every partners of the partnership firm takes part in the management. |
| Liability of Owners | Liability of a member of a company may be limited by shares or guarantee. | A partner’s liability is unlimited. |
| Perpetual Succession | The death or insolvency of shareholders or all of them does not affect the life of a company. | The death or insolvency of a partner may dissolve the partnership firm. |
| Audit of Accounts | The accounts of company must be periodically audited by Chartered Accountants | Audit of Accounts of partnership firms by Chartered Accountant is not mandatory |
Types of Company
According to form of ownership and control, maintenance of accounts and accounting reports, audit etc., the Companies may be classified as follows.
- Statutory Company : Companies incorporated under special act passed by the State Legislature or Parliament (like Unit Trust of India, Life Insurance Corporation, Reserve Bank of India, State Bank of India etc).
Such companies are not required to use the word ‘limited’ as part of their name. The accounts of these companies are audited by Comptroller and Auditor General of India and they are publicly accountable to the State Legislature/ Parliament.
- Government Company : Company in which at least 51% of the paid up capital is held by the Central Government, State Government and includes a company which is a subsidiary company of a Government Company.
- Foreign Company : Company which is incorporated in a country outside of India under the law of that other country and has a place of business in India.
- Limited Company : Company in which liability of members is limited by shares or guarantee.
- Unlimited Company : Company in which the liability of the shareholders is not restricted. An unlimited company may or may not have any share capital. It may be a public or private company.
- Public Company : Company which is not a private company, having minimum paid up capital of 5 lakhs, or is a private company which is a subsidiary of a company which is not a private company.
- Private Company : Private company is a company, which has a minimum paid up capital of one lakh rupees and which, by its Articles, restricts the right of members to transfer its shares, limits the number of its members to fifty ( not including the employee or former employee in some cases), prohibits any invitation to the public to subscribe any shares, in or debentures of, the company
- Holding and Subsidiary Company
- Holding Company : Company which has control over another company.
- Subsidiary Company : A company becomes a subsidiary company when other company controls or holds 51% or more of its paid up share capital, or has right to appoint directors on its board, or is a subsidiary of its another subsidiary company.
- Listed Company : Companies whose securities are listed in Stock Exchange for trading.
- Unlisted Company : Companies whose securities are not listed in Stock Exchange for trading.
- Investment Company : Companies engaged in acquiring, holding and dealing in shares and securities.
- Finance Company : Non banking companies carrying business of lending and borrowing money, Acquiring shares, securities, bonds etc. financing hire purchase transactions, Housing etc
Memorandum & Articles of Association
The Compnaies are principally governed by 2 key documents; namely Memorandum and Articles of Association.
- Memorandum of Association : The Memorandum of Association is a document which sets out the constitution of the company. It defines the scope of the company’s activities and its relations with the outside world.
Its purpose is to enable shareholders and those who deal with the company to know what the company is permitted to do.
- Articles of Association : The Articles of Association of a company are its by-laws or rules and regulations that govern the management of its internal affairs and the conduct of the business.
Company Books of Accounts
A Company must maintain such Books of Accounts as to give true and fair view of the state of affairs of the company. The transaction will be kept on accrual basis of accounting and will be based on double entry system,
Financial Statements : The company shall lay down the Balance sheet and the Profit & Loss Account (or an Income and Expenditure Account), at the end of the accounting year, in prescribed format
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