SHARES

1. Meaning of Shares
●​ A share is the smallest unit of a company’s capital.
●​ Owning shares = being a part-owner of the company.
●​ Shareholders enjoy rights (vote, dividend, bonus shares) and have limited liability (only
up to unpaid value of shares).

2. Features of Shares
●​ Ownership: Represent part-ownership of company.
●​ Transferable: Shares are movable property.
●​ Limited Liability: Shareholder’s risk limited to unpaid amount.
●​ Income: Shareholders earn dividend (not interest).
●​ Rights: Right to vote, receive dividends, and claim surplus on winding up.

3. Types of Share Capital

1.​ Authorized / Nominal Capital → Maximum capital company is allowed to raise.
2.​ Issued Capital → Portion of authorized offered to public.
3.​ Subscribed Capital → Portion of issued capital actually taken up.
○​ Called-up Capital → Amount company has asked for.
○​ Calls in Arrears → Amount demanded but not received.
○​ Calls in Advance → Amount received before demand.
4.​ Paid-up Capital → Actual amount received.
5.​ Reserve Capital → Part of subscribed capital not called up except at winding up.

4. Types of Shares (Sec 43, Co. Act 2013)

A. Equity Shares
 ●​ Ordinary shares.
●​ Carry voting rights.
●​ Dividend not fixed → depends on profit.
●​ Higher risk, but potential higher returns.

B. Preference Shares

●​ Enjoy two special rights:

○​ Fixed dividend.
○​ Priority in repayment at winding up.
●​ Types of Preference Shares
1.​ Cumulative Preference Shares – Unpaid dividend accumulates and must be paid
before equity dividend.
2.​ Non-Cumulative Preference Shares – Dividend lapses if not declared in a year.
3.​ Redeemable Preference Shares – Repaid after a fixed period or as per terms of issue.
4.​ Irredeemable Preference Shares – Not repayable during the lifetime of the company
(not allowed in India as per Companies Act, 2013).
5.​ Convertible Preference Shares – Can be converted into equity shares after a certain
period.
6.​ Non-Convertible Preference Shares – Cannot be converted into equity shares.
7.​ Participating Preference Shares – Entitled to share profits beyond fixed dividend (with
equity holders).
8.​ Non-Participating Preference Shares – Get only fixed dividend, no extra share in
profits.
●​

5. Methods of Issue of Shares

A company can issue shares in the following ways (as per Companies Act, 2013 & SEBI
guidelines):

[Link] Issue
When shares are offered to the general public through a prospectus.

(a) Initial Public Offer (IPO)

●​ First time a company offers shares to the public.

●​ Used by new companies entering the stock market.
 ●​ Example: Zomato IPO in 2021.

(b) Further Public Offer (FPO)

●​ Subsequent issue after IPO.

●​ Companies already listed may issue additional shares to raise more capital.

[Link] Placement
●​ Company offers shares to a selected group of investors (like banks, mutual funds,
venture capitalists).
●​ Faster and less expensive than public issue.
●​ Governed by Section 42 of the Companies Act, 2013.
●​ Example: Reliance Jio issued shares to Google & Facebook through private placement.

C. Preferential Allotment
●​ Shares are issued to a particular group (promoters, financial institutions, venture
capitalists) at a pre-decided price.
●​ Quicker way to raise capital.
●​ Not open to general public.

D. Rights Issue
●​ New shares offered to existing shareholders in proportion to their current holdings.
●​ Purpose: Prevents dilution of ownership.
●​ Example: If shareholder owns 100 shares, he may get “1 share for every 5 held”.
●​ Governed by Section 62(1)(a) of the Companies Act, 2013.

[Link] Issue
●​ Shares issued free of cost to existing shareholders.
●​ Source: Company’s free reserves, securities premium, or capital redemption reserve.
●​ Purpose: To reward shareholders without paying cash.
 ●​ Example: A “1:1 bonus” means 1 free share for every 1 share held.

[Link] Stock Option Plan (ESOP) (Special Method)

●​ Right given to employees/directors to buy shares at concessional price in future.
●​ Motivates employees to work for company’s growth.

G. Sweat Equity Shares (Special Method)

●​ Issued at discount or for non-cash consideration to employees/directors.
●​ Given in exchange for know-how, intellectual property, or value addition.

6. Issue of Shares
●​ At Par → Price = Face value.
●​ At Premium → Price > Face value. Excess → Securities Premium Reserve.
●​ At Discount → Price < Face value (prohibited, except sweat equity).

7. Securities Premium Reserve (Sec 52)

Can be used for:

●​ Issue of fully paid bonus shares.

●​ Writing off preliminary expenses.
●​ Writing off discount/commission on issue of securities.
●​ Premium payable on redemption of preference shares/debentures.
●​ Buy-back of shares.

8. Subscription of Shares
●​ Minimum Subscription → At least 90% of issued amount must be subscribed; else
refund.
 ●​ Oversubscription → Applications > Shares offered → pro-rata allotment or rejection.
●​ Undersubscription → Applications < Shares offered → valid only if ≥ minimum
subscription.

9. Calls in Arrears & Calls in Advance

●​ Calls in Arrears
○​ When shareholder does not pay called-up money.
○​ Shown as deduction from Called-up Capital in Balance Sheet.
○​ Interest on Calls in Arrears:
■​ Company can charge interest up to 10% p.a. (from date of call to date of
payment).
●​ Calls in Advance
○​ When shareholders pay before due date.
○​ Shown as liability in Balance Sheet.
○​ Interest on Calls in Advance:
■​ Company pays interest up to 6% p.a. (from date of receipt to date of call).

10. Forfeiture of Shares

●​ If shareholder fails to pay allotment or calls, shares may be forfeited.
●​ Effects:
○​ Shareholder loses membership.
○​ Money already received is not refunded.

11. Reissue of Forfeited Shares

●​ Forfeited shares can be reissued at any price.
●​ Discount allowed ≤ amount forfeited.
●​ Balance in Forfeited Shares A/c after reissue → transferred to Capital Reserve.

12. Issue of Shares for Consideration Other than Cash

●​ To vendors (payment for assets).
 ●​ To promoters (for services).
●​ Non-cash transactions recorded at fair value.

Chapter 1: Fundamentals of Partnership

Meaning

●​ Partnership is defined in Section 4 of the Indian Partnership Act, 1932:​

“Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any one of them acting for all.”
●​ Partners = Persons who enter into partnership.
●​ Partnership Firm = Collective name of partners.
●​ Firm Name = Name under which business is carried.

Essential Features of Partnership

1.​ Agreement – Partnership arises from agreement, not by status. It may be oral or written.
2.​ Business – Partnership is only for lawful business (not charity, not illegal activities).
3.​ Sharing of Profits – Partners share profits and losses in agreed ratio (or equally if no
agreement).
4.​ Mutual Agency – Every partner is an agent (can bind the firm) and a principal (bound by
acts of others).
5.​ Number of Partners – Minimum = 2, Maximum = 50 (as per Companies Act 2013).
6.​ Liability – Unlimited liability of partners; even personal assets can be used to pay debts.

Partnership Deed

●​ Definition: A written document containing rules of partnership.

●​ Contents: Name & address of firm/partners, nature of business, capital contribution,
profit-sharing ratio, interest on capital/drawings, salary/commission, method of accounts,
admission/retirement terms, etc.
●​ Importance: Avoids disputes. Written deed is strong evidence in court.

Provisions if No Deed (Indian Partnership Act, 1932)

●​ Profits shared equally.

●​ No interest on capital.
●​ No salary/commission to partners.
●​ Interest on loan by partner → 6% p.a. allowed.
●​ Drawings → no interest charged.

Capital Accounts of Partners

 1.​ Fixed Capital Method – Capital balance remains fixed; only additional capital
introduced/withdrawn changes it. All adjustments for drawings, interest, salary, etc., go
through Current A/c.
2.​ Fluctuating Capital Method – Only one Capital A/c is maintained. All adjustments
(capital, drawings, interest, salary, reserves, share of profit/loss) are made in the same
account.

Difference Table:

Basis Fixed Capital Fluctuating Capital

Balance Usually remains constant Keeps changing

Current A/c Maintained separately Not required

Adjustments In Current A/c In Capital A/c

Preference Large firms Small firms

Chapter 2: Goodwill – Nature & Valuation

Meaning & Nature

●​ Goodwill is the value of firm’s reputation in the market which enables it to earn excess
profits.
●​ Intangible asset (cannot be seen but has value).
●​ Inseparable from business.
●​ Fluctuating in nature (can increase/decrease).
●​ Saleable only when entire business is sold.

AS-26 : Intangible Assets

●​ Intangible assets = non-monetary assets without physical substance (e.g.,

goodwill, patents, software).
●​ Recognized only if: identifiable, controlled, gives future benefits, and cost
can be measured.

❌
●​ Goodwill:

✅
○​ Internally generated goodwill not recorded.
○​ Purchased goodwill recorded, amortized over useful life (max 10
yrs).

Factors Affecting Goodwill

 ●​ Quality of product/service.
●​ Efficient management.
●​ Location advantage.
●​ Long existence in market.
●​ Favourable contracts.
●​ Monopoly or brand loyalty.

Need for Valuation of Goodwill

●​ At admission of partner → new partner compensates old partners.

●​ At retirement/death → continuing partners compensate outgoing partner.
●​ At change in ratio → sacrificing partner compensated by gaining partner.
●​ At dissolution/amalgamation → goodwill included in firm’s assets.

Methods of Valuation

1.​ Average Profit Method

○​ Goodwill = Average Profit × No. of years’ purchase.
○​ Weighted Average Profit Method → weights given to profits of past years to
highlight trend.
2.​ Super Profit Method
○​ Super Profit = Actual Average Profit – Normal Profit.
○​ Normal Profit = Capital Employed × Normal Rate of Return / 100.
○​ Goodwill = Super Profit × No. of years’ purchase.
3.​ Capitalisation Method
○​ Capitalised Value = Average Profit × 100 / Normal Rate of Return.
○​ Goodwill = Capitalised Value – Net Assets.

Chapter 3: Change in Profit-Sharing Ratio

Need

●​ When partners decide to change existing ratio due to admission, retirement, or mutual
agreement.

Sacrificing Ratio

●​ Sacrifice made by old partners.

●​ Formula: Old Share – New Share.
●​ Partner who sacrifices gets compensation (goodwill).

Gaining Ratio
 ●​ Gain obtained by continuing partners (esp. at retirement/death).
●​ Formula: New Share – Old Share.
●​ Partner who gains compensates sacrificing partner.

Adjustments Required

1.​ Goodwill adjustment.

2.​ Revaluation of assets and liabilities.
3.​ Distribution of reserves and accumulated profits.

Chapter 4: Admission of a Partner

Meaning

●​ A new partner admitted with consent of all existing partners (Sec 31).

Rights of New Partner

●​ To share in profit.
●​ To inspect books of accounts.
●​ To share in firm’s assets.

Adjustments at Admission

1.​ Calculation of new ratio & sacrificing ratio.

2.​ Treatment of goodwill (new partner compensates sacrificing partners).
3.​ Revaluation of assets/liabilities to ensure old partners’ interests are protected.
4.​ Distribution of reserves & accumulated profits among old partners.
5.​ Capital adjustment (based on agreed capital structure).

Chapter 5: Retirement of a Partner

Meaning

●​ When a partner leaves but firm continues with remaining partners.

Adjustments Required

1.​ Calculation of new ratio & gaining ratio.

 2.​ Goodwill → continuing partners compensate retiring partner.
3.​ Revaluation of assets/liabilities.
4.​ Distribution of reserves.
5.​ Settlement of retiring partner’s capital:
○​ Paid in cash or transferred to Loan A/c.

Section 37 – Rights of outgoing partner in certain cases to share subsequent profits​

If a partner retires and his account is not settled (i.e., payment not made), he has the right to
claim:

1.​ Interest @ 6% p.a. on the amount due to him, or

2.​ Share of profits earned by the firm with the use of his money (at his option).(final
outstanding capital ratio )

Chapter 6: Death of a Partner

Adjustments

●​ Similar to retirement, but settlement made to legal representatives.

1.​ Share of goodwill.
2.​ Share of profit till death → based on last year’s profit or average profit.
3.​ Share in reserves.
4.​ Interest on capital/salary (if agreed).

Difference: Retirement vs Death

●​ Retirement = partner alive, personally settles.

●​ Death = settlement with legal heirs.

Chapter 7: Dissolution of Partnership Firm

Meaning

●​ Dissolution of partnership → only relation between partners changes (e.g.,

retirement/admission).
●​ Dissolution of firm → entire business closes down, accounts settled.

Modes of Dissolution of Partnership Firm

 1.​ By Agreement (Sec. 40)
a.​ With consent of all partners or as per contract between them.
2.​ Compulsory Dissolution (Sec. 41)
a.​ If all partners become insolvent or all except one become insolvent, or business
becomes unlawful.
3.​ Dissolution on the happening of certain contingencies (Sec. 42)
a.​ On expiry of fixed term, completion of venture, death, or insolvency of a partner
(unless agreement provides otherwise).
4.​ Dissolution by Notice (Sec. 43)
a.​ In case of partnership at will, any partner can dissolve by giving notice in writing.
5.​ Dissolution by Court (Sec. 44)
a.​ On a partner’s suit, court may order dissolution on grounds like:
i.​ Partner’s insanity, permanent incapacity, misconduct, persistent breach of
agreement, transfer of interest, continuous losses, or if just and equitable.

Settlement of Accounts (Sec 48, Indian Partnership Act 1932)

1.​ Losses borne → first from profits, then capital, then partners personally.
2.​ Payments →
○​ Outside liabilities first.
○​ Partners’ loans next.
○​ Partners’ capital last.
○​ Surplus (if any) → distributed among partners.

Realisation Account

●​ Prepared to record:
○​ Sale of assets.
○​ Payment of liabilities.
○​ Realisation expenses.
○​ Distribution of balance to partners.