ICAI Notes- Unit 1: Introduction to Company Accounts - CA Foundation PDF Download

 Page 1


 
LEARNING OUTCOMES 
COMPANY ACCOUNTS   
UNIT – 1 INTRODUCTION TO COMPANY ACCOUNTS 
 
 
 
After studying this unit, you would be able to:  
? Understand the reason for the existence and survival of a company. 
? Learn the nature and types of companies. 
? Explain the salient features of a company. 
? Understand the purpose of preparing the financial statements of the 
company. 
 
11 
CHAPTER 
   
© The Institute of Chartered Accountants of India
Page 2


 
LEARNING OUTCOMES 
COMPANY ACCOUNTS   
UNIT – 1 INTRODUCTION TO COMPANY ACCOUNTS 
 
 
 
After studying this unit, you would be able to:  
? Understand the reason for the existence and survival of a company. 
? Learn the nature and types of companies. 
? Explain the salient features of a company. 
? Understand the purpose of preparing the financial statements of the 
company. 
 
11 
CHAPTER 
   
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.2 
11.2 
 
 
Tyes of 
Companies
Government 
Company
Foreign 
company
Private 
company
Public 
Company
One 
Person 
Company
Small 
Company
Listed 
Company
Unlimite
d 
Compnay
Company 
limited 
by 
Shares
Company 
limited 
by 
Gurantee
Holding 
Company
Subsidiary 
Company
Preparation 
of Financial 
Statements
Statement 
of Profit 
and Loss
Cash Flow 
Statement
Notes to 
Accounts
Balance 
Sheet
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 
LEARNING OUTCOMES 
COMPANY ACCOUNTS   
UNIT – 1 INTRODUCTION TO COMPANY ACCOUNTS 
 
 
 
After studying this unit, you would be able to:  
? Understand the reason for the existence and survival of a company. 
? Learn the nature and types of companies. 
? Explain the salient features of a company. 
? Understand the purpose of preparing the financial statements of the 
company. 
 
11 
CHAPTER 
   
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.2 
11.2 
 
 
Tyes of 
Companies
Government 
Company
Foreign 
company
Private 
company
Public 
Company
One 
Person 
Company
Small 
Company
Listed 
Company
Unlimite
d 
Compnay
Company 
limited 
by 
Shares
Company 
limited 
by 
Gurantee
Holding 
Company
Subsidiary 
Company
Preparation 
of Financial 
Statements
Statement 
of Profit 
and Loss
Cash Flow 
Statement
Notes to 
Accounts
Balance 
Sheet
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
11.3 COMPANY ACCOUNTS 
1.1 INTRODUCTION  
The never-ending human desire to grow and grow further has given rise to the expansion of 
business activities, which in turn has necessitated the need to increase the scale of operations 
so as to provide goods and services to the ever-increasing needs of the growing population 
of consumers. Large amount of money, modern technology, large human contribution etc. is 
required for it, which is not possible to arrange under partnership or proprietorship. To 
overcome this difficulty, the concept of ‘Company’ or ‘Corporation’ came into existence. 
While the invention of steam power ignited the human imagination to build big machines for 
the mass production of goods, the need to separate the management from ownership gave 
birth to a form of organisation today known as ‘company’. 
Company form of organisation is one of the ingenious creations of human mind, which has 
enabled the business to carry on its wealth creation activities through optimum utilisation of 
resources. In course of time, a company structure has become an important institutional form 
for business enterprise, which has carved out a key place for itself in the field of business 
operations as well as in the wealth-generating functions of society. 
1.2  MEANING OF COMPANY  
The word ‘Company’, in everyday usage, implies an assemblage of persons for social purpose, 
companionship or fellowship. As a form of organisation, the word ‘company’ implies a group 
of people who voluntarily agree to form a company. 
The word ‘company’ is derived from the Latin word ‘com’ i.e. with or together and ‘panis’ i.e. 
bread. Originally the word referred to an association of persons or merchant men discussing 
matters and taking food together. However, in law ‘company’ is termed as company which is 
formed and incorporated under the Companies Act, 2013 or an existing company formed and 
registered under any of the previous company laws. As per this definition of law, there must 
be group of persons who agree to form a company under the law and once so formed; it 
becomes a separate legal entity having perpetual succession with a distinct name of its own 
and a common seal. Its existence is not affected by the change of members. 
Company begs its origin in law. It is an organisation consisting of individuals, called 
shareholders by virtue of holding the shares of a company, who are authorised by law to elect 
a board of directors and, through it, to act as a separate legal entity as regards its activities. 
Generally, the capital of the company consists of transferable shares, and members have 
limited liabilities. 
To get to the heart of the nature of the company, let us examine the concept of company 
propounded under corporate jurisprudence. 
© The Institute of Chartered Accountants of India
Page 4


 
LEARNING OUTCOMES 
COMPANY ACCOUNTS   
UNIT – 1 INTRODUCTION TO COMPANY ACCOUNTS 
 
 
 
After studying this unit, you would be able to:  
? Understand the reason for the existence and survival of a company. 
? Learn the nature and types of companies. 
? Explain the salient features of a company. 
? Understand the purpose of preparing the financial statements of the 
company. 
 
11 
CHAPTER 
   
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.2 
11.2 
 
 
Tyes of 
Companies
Government 
Company
Foreign 
company
Private 
company
Public 
Company
One 
Person 
Company
Small 
Company
Listed 
Company
Unlimite
d 
Compnay
Company 
limited 
by 
Shares
Company 
limited 
by 
Gurantee
Holding 
Company
Subsidiary 
Company
Preparation 
of Financial 
Statements
Statement 
of Profit 
and Loss
Cash Flow 
Statement
Notes to 
Accounts
Balance 
Sheet
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
11.3 COMPANY ACCOUNTS 
1.1 INTRODUCTION  
The never-ending human desire to grow and grow further has given rise to the expansion of 
business activities, which in turn has necessitated the need to increase the scale of operations 
so as to provide goods and services to the ever-increasing needs of the growing population 
of consumers. Large amount of money, modern technology, large human contribution etc. is 
required for it, which is not possible to arrange under partnership or proprietorship. To 
overcome this difficulty, the concept of ‘Company’ or ‘Corporation’ came into existence. 
While the invention of steam power ignited the human imagination to build big machines for 
the mass production of goods, the need to separate the management from ownership gave 
birth to a form of organisation today known as ‘company’. 
Company form of organisation is one of the ingenious creations of human mind, which has 
enabled the business to carry on its wealth creation activities through optimum utilisation of 
resources. In course of time, a company structure has become an important institutional form 
for business enterprise, which has carved out a key place for itself in the field of business 
operations as well as in the wealth-generating functions of society. 
1.2  MEANING OF COMPANY  
The word ‘Company’, in everyday usage, implies an assemblage of persons for social purpose, 
companionship or fellowship. As a form of organisation, the word ‘company’ implies a group 
of people who voluntarily agree to form a company. 
The word ‘company’ is derived from the Latin word ‘com’ i.e. with or together and ‘panis’ i.e. 
bread. Originally the word referred to an association of persons or merchant men discussing 
matters and taking food together. However, in law ‘company’ is termed as company which is 
formed and incorporated under the Companies Act, 2013 or an existing company formed and 
registered under any of the previous company laws. As per this definition of law, there must 
be group of persons who agree to form a company under the law and once so formed; it 
becomes a separate legal entity having perpetual succession with a distinct name of its own 
and a common seal. Its existence is not affected by the change of members. 
Company begs its origin in law. It is an organisation consisting of individuals, called 
shareholders by virtue of holding the shares of a company, who are authorised by law to elect 
a board of directors and, through it, to act as a separate legal entity as regards its activities. 
Generally, the capital of the company consists of transferable shares, and members have 
limited liabilities. 
To get to the heart of the nature of the company, let us examine the concept of company 
propounded under corporate jurisprudence. 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.4 
11.4 
According to Justice Marshal, “A corporation is an artificial being, invisible, intangible and 
existing only in the contemplation of law”. 
In the same manner, Lord Justice Hanay has defined a company as “an artificial person created 
by law with a perpetual succession and a common seal”. 
A common thread running through the various definitions of ‘company’ is that it is an 
association of persons created by law as a separate body for a special purpose. At the same 
time, definitions have laid down certain characteristics of a corporate organisation, which 
make it out as a separate and unique organisation which enables the people to contribute 
their wealth to the capital of the company by subscribing to its shares and appointing elected 
representatives to carry out the business. 
1.3  SALIENT FEATURES OF A COMPANY  
Following are the salient features of a company: 
1. Incorporated Association: A company comes into existence through the operation of 
law. Therefore, incorporation of company under the Companies Act is must. Without 
such registration, no company can come into existence. Being created by law, it is 
regarded as an artificial legal person. 
2. Separate Legal Entity: A company has a separate legal entity and is not affected by 
changes in its membership. Therefore, being a separate business entity, a company can 
contract, sue and be sued in its incorporated name and capacity. 
3. Perpetual Existence: Since company has existence independent of its members, it 
continues to be in existence despite the death, insolvency or change of members. 
4. Common Seal: Company is not a natural person; therefore, it cannot sign the 
documents in the manner as a natural person would do. In order to enable the 
company to sign its documents, it is provided with a legal tool called ‘Common Seal’. 
The common seal is affixed on all documents by the person authorised to do so who 
in turn puts his signature for and on behalf of the company. Companies Act, 2013 
required common seal to be affixed on certain documents (such as bill of exchange, 
share certificates, etc.) Now, the use of common seal has been made optional. All such 
documents which required affixing the common seal may now instead be signed by 
two directors or one director and a company secretary of the company. Further, every 
company registered in India are required to obtain unique Corporate Identification 
Number (CIN) that is assigned by Registrar of Companies.  
© The Institute of Chartered Accountants of India
Page 5


 
LEARNING OUTCOMES 
COMPANY ACCOUNTS   
UNIT – 1 INTRODUCTION TO COMPANY ACCOUNTS 
 
 
 
After studying this unit, you would be able to:  
? Understand the reason for the existence and survival of a company. 
? Learn the nature and types of companies. 
? Explain the salient features of a company. 
? Understand the purpose of preparing the financial statements of the 
company. 
 
11 
CHAPTER 
   
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.2 
11.2 
 
 
Tyes of 
Companies
Government 
Company
Foreign 
company
Private 
company
Public 
Company
One 
Person 
Company
Small 
Company
Listed 
Company
Unlimite
d 
Compnay
Company 
limited 
by 
Shares
Company 
limited 
by 
Gurantee
Holding 
Company
Subsidiary 
Company
Preparation 
of Financial 
Statements
Statement 
of Profit 
and Loss
Cash Flow 
Statement
Notes to 
Accounts
Balance 
Sheet
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
11.3 COMPANY ACCOUNTS 
1.1 INTRODUCTION  
The never-ending human desire to grow and grow further has given rise to the expansion of 
business activities, which in turn has necessitated the need to increase the scale of operations 
so as to provide goods and services to the ever-increasing needs of the growing population 
of consumers. Large amount of money, modern technology, large human contribution etc. is 
required for it, which is not possible to arrange under partnership or proprietorship. To 
overcome this difficulty, the concept of ‘Company’ or ‘Corporation’ came into existence. 
While the invention of steam power ignited the human imagination to build big machines for 
the mass production of goods, the need to separate the management from ownership gave 
birth to a form of organisation today known as ‘company’. 
Company form of organisation is one of the ingenious creations of human mind, which has 
enabled the business to carry on its wealth creation activities through optimum utilisation of 
resources. In course of time, a company structure has become an important institutional form 
for business enterprise, which has carved out a key place for itself in the field of business 
operations as well as in the wealth-generating functions of society. 
1.2  MEANING OF COMPANY  
The word ‘Company’, in everyday usage, implies an assemblage of persons for social purpose, 
companionship or fellowship. As a form of organisation, the word ‘company’ implies a group 
of people who voluntarily agree to form a company. 
The word ‘company’ is derived from the Latin word ‘com’ i.e. with or together and ‘panis’ i.e. 
bread. Originally the word referred to an association of persons or merchant men discussing 
matters and taking food together. However, in law ‘company’ is termed as company which is 
formed and incorporated under the Companies Act, 2013 or an existing company formed and 
registered under any of the previous company laws. As per this definition of law, there must 
be group of persons who agree to form a company under the law and once so formed; it 
becomes a separate legal entity having perpetual succession with a distinct name of its own 
and a common seal. Its existence is not affected by the change of members. 
Company begs its origin in law. It is an organisation consisting of individuals, called 
shareholders by virtue of holding the shares of a company, who are authorised by law to elect 
a board of directors and, through it, to act as a separate legal entity as regards its activities. 
Generally, the capital of the company consists of transferable shares, and members have 
limited liabilities. 
To get to the heart of the nature of the company, let us examine the concept of company 
propounded under corporate jurisprudence. 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.4 
11.4 
According to Justice Marshal, “A corporation is an artificial being, invisible, intangible and 
existing only in the contemplation of law”. 
In the same manner, Lord Justice Hanay has defined a company as “an artificial person created 
by law with a perpetual succession and a common seal”. 
A common thread running through the various definitions of ‘company’ is that it is an 
association of persons created by law as a separate body for a special purpose. At the same 
time, definitions have laid down certain characteristics of a corporate organisation, which 
make it out as a separate and unique organisation which enables the people to contribute 
their wealth to the capital of the company by subscribing to its shares and appointing elected 
representatives to carry out the business. 
1.3  SALIENT FEATURES OF A COMPANY  
Following are the salient features of a company: 
1. Incorporated Association: A company comes into existence through the operation of 
law. Therefore, incorporation of company under the Companies Act is must. Without 
such registration, no company can come into existence. Being created by law, it is 
regarded as an artificial legal person. 
2. Separate Legal Entity: A company has a separate legal entity and is not affected by 
changes in its membership. Therefore, being a separate business entity, a company can 
contract, sue and be sued in its incorporated name and capacity. 
3. Perpetual Existence: Since company has existence independent of its members, it 
continues to be in existence despite the death, insolvency or change of members. 
4. Common Seal: Company is not a natural person; therefore, it cannot sign the 
documents in the manner as a natural person would do. In order to enable the 
company to sign its documents, it is provided with a legal tool called ‘Common Seal’. 
The common seal is affixed on all documents by the person authorised to do so who 
in turn puts his signature for and on behalf of the company. Companies Act, 2013 
required common seal to be affixed on certain documents (such as bill of exchange, 
share certificates, etc.) Now, the use of common seal has been made optional. All such 
documents which required affixing the common seal may now instead be signed by 
two directors or one director and a company secretary of the company. Further, every 
company registered in India are required to obtain unique Corporate Identification 
Number (CIN) that is assigned by Registrar of Companies.  
© The Institute of Chartered Accountants of India
11.5 COMPANY ACCOUNTS 
5. Limited Liability: The liability of every shareholder of a company is limited to the 
amount he has agreed to pay to the company on the shares allotted to him. If such 
shares are fully paid-up, he is subject to no further liability. 
6. Distinction between Ownership and Management: Since the number of shareholders is 
very large and may be distributed at different geographical locations, it becomes 
difficult for them to carry on the operational management of the company on a day-
to-day basis. This gives rise to the need of separation of the management and 
ownership. 
7. Not a citizen: A company is not a citizen in the same sense as a natural person is, 
though it is created by the process of law. It has a legal existence but does not enjoy 
the citizenship rights and duties as are enjoyed by the natural citizens. 
8. Transferability of Shares: The capital is contributed by the shareholders through the 
subscription of shares. Such shares are transferable by its members except in case of a 
private limited company, which may have certain restrictions on such transferability. 
9. Maintenance of Books: A limited company is required by law to keep a prescribed set 
of account books and any failure in this regard attracts penalties. 
10. Periodic Audit:  A company has to get its accounts periodically audited through the 
chartered accountants appointed for the purpose by the shareholders on the 
recommendation of board of directors. 
11. Right of Access to Information: The right of the shareholders of a company to inspect 
its books of account, with the exception of books open for inspection under the 
Statute, is governed by the Articles of Association. The shareholders have a right to 
seek information from the directors by participating in the meetings of the company 
and through the periodic reports. 
1.4  TYPES OF COMPANIES 
1.  Government Company 
According to Section 2(45) of the Companies Act, 2013, “Government company” means any 
company in which not less than fifty-one per cent of the paid-up share capital is held by the 
Central Government, or by any State Government or Governments, or partly by the Central 
Government and partly by one or more State Governments, and includes a company which is 
a subsidiary company of such a Government company.  
2.  Foreign Company 
According to Section 2 (42) of the Companies Act, 2013, “Foreign company” means any 
company or body corporate incorporated outside India which –  
© The Institute of Chartered Accountants of India