Introduction to Company Accounts
Introduction to Company Accounts
Company accounts are known as a summarization of an organization's financial activity which has been performed over a period of 12 month. They are prepared for Companies House and HM Revenue & Customs every year and consist of the Balance Sheet, the Profit and Loss Statement, and the Cash Flow Statement. (“Company Profit Sharing Accounts”) and any contributions made by an Employer under prior plans, as well as to any income and/or earnings attributable to such Company Contributions and prior plan contributions.
Basic Concept of Company Accounts for New Entrepreneurs & Purpose of Company Accounts:
Company accounts are a summary of an organization’s financial activity over 12 months. They are prepared for Companies House and HM Revenue & Customs every year and consist of the Balance Sheet, the Profit and Loss Statement, and the Cash Flow Statement.
Purpose of Company Accounts:
Company accounts are used to track the cash balance, money owed to the business, money owed to creditors, Excess, and access and the payroll paid to employees.
Company accounts are an analysis of an organization’s financial activity over a period (12 months). For showing the financial performance of a company, accounts are maintained and they are prepared in corporate accounting.
It is a recording of the issue of shares, debentures, etc. of the company. Other routine accounts of the company are also recorded. With all these details, every year the company prepares accounts consisting of the Cash Flow Statement, the Profit and Loss Statement, and Balance Sheet.
Company Accounts- Issue of Shares
The issue of shares is a process in which a company allocates new shares to the public. The company issues prospectus, receives applications and then allocates them to the public. Shares are issued either at par or a premium or a discount. If the shares of a company are issued at a price more than the face value of the shares, the excess amount is called the premium. If the shares are issued at a price less than the face value of the share, it is called shares issued at a discount. The image below gives a clear idea of the issue of shares.
Company Accounts- Accounting for Share Capital
A company cannot generate its capital, which has to be necessarily collected from several persons. The persons who contributed the amount are the shareholders and the amount thus collected is the share capital of the company. The capital amount collected is kept in a “Share Capital Account”.
From the point of accounting, the share capital of the company is classified as (1) Authorized Capital, (2) Issued Capital, (3) Subscribed Capital, (4) Called up Capital, (5) Paid-up Capital, (6) uncalled capital, and (7) Reserve Capital.
The issue of ordinary shares is accounted for by allocating the proceeds under (1) Share Capital Account and (2) Share Premium Account. All the money received along with the application is deposited with a scheduled bank in a separate account as above opened for the purpose.
Company Accounts– Notes
Company accounts are a consolidation of a company’s financial activities for one year. It consists of the Cash Flow Statement, Balance Sheet, and Profit & Loss Account.
The Cash Flow Statement reveals the movement of cash in and out of the business over the financial year. There are three categories in the cash flow statement. One is Operating activities, which reveals the amount of cash that came from the sales of goods and services less the amount needed to sell goods/ services. The second one is Investing activities, which shows the amount of cash spent on capital expenditure. And, the third one is Financing activities, which shows the amount of cash spent on outside financing.
The Balance Sheet of a company gives an insight into the assets, liabilities, and shareholders' equity at a specific point in time. It indicates the financial health of the company.
In a Profit & Loss Account, we can see the details of the revenues and expenses of business throughout the financial year. It differs from the balance sheet as it records performance over some time rather than a snapshot.
FAQs on Basic Concepts of Company Accounts: A Beginner's Guide
1. What are company accounts and what key financial statements do they include as per the CBSE syllabus?
Company accounts are the formal records of a company's financial activities, prepared annually in accordance with the Companies Act, 2013. They provide a summary of the company's performance and financial position. For the 2025-26 session, the primary financial statements included are:
- Balance Sheet: This statement shows the company’s assets, liabilities, and equity at a specific point in time, revealing its financial stability.
- Statement of Profit and Loss: Also known as the Income Statement, it details the company's revenues, expenses, and net profit or loss over the financial year.
- Cash Flow Statement: This statement tracks the movement of cash from operating, investing, and financing activities, showing how a company generates and uses cash.
2. What is share capital, and how is it classified in a company's Balance Sheet?
Share Capital represents the funds raised by a company through the issue of shares to its owners (shareholders). It is a major source of finance for a company. From an accounting perspective, it is classified into several categories to provide clarity to stakeholders:
- Authorised Capital: The maximum amount of capital a company is legally permitted to raise by issuing shares, as stated in its Memorandum of Association.
- Issued Capital: The portion of the authorised capital that the company has offered to the public for subscription.
- Subscribed Capital: The part of the issued capital that has been subscribed to (or accepted) by the investors.
- Called-up Capital: The amount of the subscribed capital that the company has asked shareholders to pay.
- Paid-up Capital: The actual amount of money that shareholders have paid on their called-up shares. This is the amount that appears on the liability side of the Balance Sheet.
3. How do company accounts differ from the accounting for a sole proprietorship?
The primary difference stems from the legal structure of the business. Here are the key distinctions:
- Legal Status: A company is a separate legal entity, distinct from its owners (shareholders). A sole proprietorship and its owner are considered one and the same.
- Liability: Shareholders in a company have limited liability, meaning their personal assets are protected. A sole proprietor has unlimited liability.
- Statutory Compliance: Company accounts must strictly adhere to the format prescribed by Schedule III of the Companies Act, 2013, and require a statutory audit. A sole proprietorship has far fewer legal and reporting requirements.
- Capital Account: A company raises funds through share capital, while a proprietorship is funded by the owner's capital account.
4. Why is the preparation of company accounts crucial for stakeholders like investors and creditors?
Company accounts are vital because they provide transparent and standardised information for various stakeholders to make informed decisions:
- For Investors: They use the financial statements to assess the company's profitability (via the Statement of P&L) and financial health (via the Balance Sheet). This helps them decide whether to invest, hold their shares, or sell them.
- For Creditors and Lenders: They analyse the company's liquidity and solvency through the Cash Flow Statement and Balance Sheet to evaluate its ability to repay loans and meet its financial obligations.
- For Management: The accounts are essential for internal decision-making, performance evaluation, budgeting, and future planning.
- For Government: Tax authorities use these accounts to determine the correct tax liability and ensure regulatory compliance.
5. What does it mean for a company to issue shares at par, premium, or discount?
These terms describe the relationship between a share's issue price and its face (or nominal) value:
- Issue at Par: Shares are issued at a price equal to their face value. For example, a share with a face value of ₹10 is issued for ₹10.
- Issue at Premium: Shares are issued at a price higher than their face value. If a ₹10 share is issued for ₹12, the extra ₹2 is the premium. This premium amount is credited to a separate account called the Securities Premium Account.
- Issue at Discount: This occurs when shares are issued at a price lower than their face value. However, as per Section 53 of the Companies Act, 2013, a company is generally prohibited from issuing shares at a discount, with exceptions like the issue of sweat equity shares.
6. How does a company's Balance Sheet provide a snapshot of its financial health?
A company's Balance Sheet offers a snapshot of its financial health by presenting what it owns (Assets) and what it owes (Liabilities and Equity) on a specific date. It is based on the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity. By analysing this, a user can assess:
- Solvency: The company's ability to meet its long-term debts, judged by comparing total assets to total liabilities.
- Liquidity: The company's ability to meet its short-term obligations, assessed by looking at current assets versus current liabilities.
- Capital Structure: The proportion of debt versus equity used to finance the assets, indicating the company's financial risk.
