DIFFERENCE BETWEEN PREFERENCE SHARES AND EQUITY SHARES & HOW SHARE CAPITAL WILL BE PRESENTED IN A BALANCE SHEET & WHAT ARE CALLS IN ARREAR.

 DIFFERENCE BETWEEN PREFERENCE SHARES AND EQUITY SHARES

Preference shares and equity shares are both types of shares issued by companies, but they have distinct characteristics:

 

1. Preference Shares:

   - Preference shares are a type of share capital that combines features of both equity and debt.

   - Holders of preference shares have a preference over equity shareholders in receiving dividends and in the distribution of assets during liquidation.

   - Preference shareholders typically receive a fixed dividend, which is paid out before any dividends are distributed to equity shareholders.

   - In the event of liquidation, preference shareholders have priority over equity shareholders in receiving back their investment.

   - However, preference shareholders usually do not have voting rights or have limited voting rights compared to equity shareholders.

   - Preference shares can be cumulative or non-cumulative. Cumulative preference shares accumulate unpaid dividends if the company is unable to pay them in a particular year, and these accumulated dividends must be paid before dividends are distributed to equity shareholders.

 

2. Equity Shares:

   - Equity shares, also known as ordinary shares or common shares, represent ownership in a company.

   - Equity shareholders have a residual claim on the company's assets and earnings after all other liabilities, including preference dividends, have been paid.

   - Unlike preference shareholders, equity shareholders do not have a fixed dividend rate. Dividends are paid out of the company's profits, and the amount can vary from year to year depending on the company's performance and management decisions.

   - Equity shareholders have voting rights in the company, allowing them to participate in decision-making processes such as electing the board of directors and voting on significant corporate matters.

 

In summary, preference shares offer preferential treatment in terms of dividends and liquidation proceeds but often lack voting rights, whereas equity shares represent ownership in the company and offer voting rights but do not guarantee dividends or priority in liquidation.   

 

 

 

HOW SHARE CAPITAL WILL BE PRESENTED IN THE BALANCE SHEET

Avenue Ltd., a Company registered with authorized capital of 1,50,000 Equity Shares of Rs.10 each. Issued 1,00,000 Equity Shares. It has called the total nominal (Face value Rs.10) of the shares and received the amount except final call of Rs.3 on 10,000 Equity shares (known as calls in arrears). Share Capital of 10,000 Equity Shares will be classified or shown as ‘Subscribed but not Fully Paid up. Share capital will be shown in Notes to Accounts as follows:

 

 

 

   Notes to Accounts

Particulars                                                            Amount     

Share Capital

Authorized Capital

1,50,000 Equity Shares of Rs.10 Each                                     15,00,000

Issued Capital

1,00,000 Equity Shares of Rs.10 Each                                     10,00,000

Subscribed Capital

Subscribed and Fully Paid-up

90,000 Equity Shares of Rs.10 Each                   9,00,000

Subscribed but not Fully paid-up

 10,000 Equity Shares of Rs.10 Each       1,00,000

Less: calls in arrear (10,000*3)                 30,000 70,000

 Total                                                                 9,70,000

 

CALLS IN ARREAR

Under the Companies Act 2013, "calls in arrear" refers to the unpaid portion of a call made by a company on its shareholders.

 

Here's a breakdown:

 

 Call: A call is a demand for payment of a certain portion of the subscribed share capital of a company. It's a way for the company to collect funds from its shareholders to meet its financial needs.

 

 Calls in Arrear: When shareholders fail to pay the call amount by the due date, the unpaid portion is termed as "calls in arrear". This unpaid amount remains a liability on the shareholder until it's paid up.

 

 Consequences: Companies typically have provisions to enforce payment of calls in arrear, which may include charging interest on the unpaid amount or even forfeiture of shares in extreme cases.

 

 Disclosure: The company must disclose the details of calls in arrear in its financial statements, ensuring transparency regarding its financial obligations.

 

 Legal Implications: Non-payment of calls in arrears can lead to legal action by the company to recover the outstanding amount, and in severe cases, it could result in the shareholder losing their shares or facing other penalties.

 

Overall, calls in arrears represent an outstanding financial obligation on the part of shareholders towards the company, which the company can enforce through legal means if necessary.

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