Chapter 1- Introduction to CompaniesChapter outcomes:

1.Different types of business organisations;2.Meaning of company;3.Types of companies;4.Meaning and types of share capital5.Meaning and types of shares6.Issue of shares;7.Proforma journal entries8.Exercises

Types of business organizations‘-

1. Sole Trader : When a business is owned and run by a single person, it is known as “Sole trading organisation”.

2. Partnership firm: When a business is owned and run by more than one person, it is known as partnership.

3. Company: It is known as “joint stock company” in which the capital is contributed by the general public in the form of “share capital”

Meaning of “Company”

A company may be defined as “an artificial person created by law, having a corporate and legal personality distinct and seperate from its members, perpetual succession and a common seal”.

The essential characteristics of a company are as follows: 1. It is an incorporated (registered) association;2. It is an artificial person created by law’;3. It has a seperate legal entity;4. It has a perpetual succession, i.e, it can be created and wound

up by law only;5. It has common seal, i.e., official signature of the company

Types of companies -

• There are three types of companies:1. Private sector companies: Those companies which are started

and run by private parties are known as “Private sector companies”

2. Public sector companies: Those companies which are started and run by government are known as “public sector companies”

3. Joint sector companies: Those companies which are jointly started and run jointly by the government and private business people.

Meaning and types of share capital

Share capital means the capital raised by the issue of shares. The amounts invested by the shareholders towards the face value of shares are collectively known as ‘share capital’ which is quite different from the capital put in by individual shareholders.

The share capital is divided into the following four heads:1. Authorised capital: Authorised capital refers to that amount which is

stated in “Capital clause” of memorandum of Association as the share capital of the company. This is the maximum amount of capital authorised by capital market authority in Oman.

2. Issued capital: Issued capital refers to the amount of share capital issued to the public for subscription.

3. Paid up capital: It refers to the amount of capital paid up by the shareholders.

4. Reserve capital: It refers to the amount of capital uncalled by the company and kept as a reserve for future use.

Meaning and classes of shares

Share is fractional part of the capital and forms the basis of ownership in a company.

There are two main classes of shares:

1. Ordinary shares or equity shares: Equity shares are called as ownership share which give ownership rights to the holders.

2. Preference shares: The shares which have some preferential rights over the equity shares. Preference shareholders has the preferential rights as to the dividend and the refund of the capital.

Issue of shares at par, premium and discount

Shares can be issued at par, or premium or discount1. When shares are issued at a price equal to the face

value, it is known as issue at par. For example, when RO.1 share is issued at RO.1

2. When shares are issued at a price higher than the face value, it is known as issue at premium. RO.1 share is issued at RO 1.200

3. When shares are issued at a price lesser than the face value, it is known as at discount. When RO. 1 share is issued at RO. 0.900

Proforma Journal entries

The following entries are recorded for the issue of shares:1. When the application money is received: Bank Account Dr. XXXX Share application account Cr. XXXX(Being the application money received)2. When the appplication money is transfered to share capital a/c: Share application account Dr. XXXX Share Capital account Cr. XXXX (Being the application money transferred to share capital account)2 (a) When the application money is refunded (Returned): Share Application account Dr. XXXXX Bank Account Cr XXXX(Being the application money refunded )3. When the allotment is made: Share allotment account Dr. XXXX Share capital account Cr. XXXX(Being the allotment money due)

Proforma entries – contd.

4. When the share allotment money is received: Bank Account Dr. XXXX Share Allotment A/c CR. XXXX(Being the allotment money received)5. When the first call money is due: Share first call A/c Dr. XXXX Share Capital A/C Cr. XXXX(Being the first call money due)6. When the first call money is received: Bank Account A/C Dr. XXXX Share First call A/C Cr. XXXX(Being the first call money received)

7. When the final call money is due: Share final call account Dr. XXXX Share capital account Cr. XXXX(Being the final call money due)8. When the final call money is received: Bank Account Dr. XXXX Share Final Call Account Cr. XXXX(Being the final call money received)

Exercise 1. Oman Textile Mills SAOG issues 10,000 ordinary shares of RO 1.000

each payable RO 0. 200 on application; RO. 0.300 on allotment , RO. 0.300 in the first call and the balance in the final call.

The company received application for 11,000 shares and allotment was made for 10,000 shares. All moneys due were fully received. Pass journal entries and ledger accounts in the books of the company

Calls in arrear and call in advance

Calls in arrear:

When any share holder fails to pay allotment money, first call or final call, the amount not received by the

company is known as “Calls in arrear.”

Calls in advance:

When any share holder pays any amount relating to calls prior to the due date, it is known as “call in

advance ”