Advance Accounting INDEX

Transcription

1 Advance Accounting INDEX Joint Venture Definition Advantages Distinction between Joint Venture & Consignment Method or Procedure/ Recording Transactions No Separate Book Separate Book Consignment When Parts of Goods Sold remain unsold Distinguish between Consignment & Sale Branch Account Classification of Branches Departmental Accounts Meaning of Departmental Accounts Basis of Allocation of Expenses Hire Purchase Installment Purchase Distinguish between Hire Purchase & Installment Purchase Shares Nature of Share Classes of Share Debentures Kinds of Debentures Distinguish between Shares & Debentures Various Methods of Redeeming Debentures Redemption in Installment Redemption by Conversion Redemption in Lump Sum Right Issue Advantages of Right Issue Bonus Issue From Company's point of view From Shareholder's point of view Companies Preparation of Final Accounts Lying accounts before General Meeting Audit of Accounts Circulation of Accounts Filing of Accounts Director's Report Formation of Company Promotion Stage Incorporate Stage Raising of Share Capital Trading or Business Commencement Certificate Memorandum of Association Clause or Particulars of Memorandum Article of Association Meaning Content of Article Amalgamation Absorption Reconstruction Difference between Amalgamation, Absorption and Reconstruction Royalty Minimum Rent or Dead Rent Short Working Interim Dividend Marge or Merger of Companies

2 1 Advance Accounting Joint Venture Definition: A joint venture is a temporary partnership of two or more persons engaged in any particular business adventure of enterprise of short or seasonal duration. It may in connection with spectacular in shares underwriting of share and debentures of new company or any other similar temporary or seasonal business enterprise. As the parties to a joint venture does business in union with other, they also share profit & loss between themselves in some agreed proportion. Advantages: The advantages of joint venture enterprise are that perhaps one party may buy goods at a much cheaper rate, but has no capital; a sound person may perhaps advance the requisite capital but has no business. While a third individual is a good salesman and can sell the goods readily at a margin. In case to, combine their energy and work for a mutual gain. Distinguish between Joint Venture and Consignment Joint Venture Consignment Parties: In joint venture parties to the agreement are known as co venture. Compensation: Co ventures are the parties in the venture and share profit or loss of the venture. Relation: Each co venture is a principal as well as an agent of the other co venture. Termination: Relation of co ventures comes to an end when venture is completed. Investment: Co ventures usually contribute towards the capital of the venture in the form of money or material. Rights: Co ventures enjoy equal rights as partners. Ownership: Co venture are the owners of their venture. Account Sales: Co venture are the relevant in formation no regular repent are submitted. In Consignment parties to the agreement known as Consignment and the Consignee. Consignee is never a partner consignee get his commission for acting the roll of the consignee. Consignee is the agent of his principal i.e. Consigner. Relationship of consigner and consignee certain until terminated by parties. Consignee does not contribute towards the capital. Consignee only acts as an agent. In consignment the consigner is the owner not the consignee. Consignee is required to send periodically account sales to consigner. Method of Procedure/ Recording transactions There are two ways in which joint venture account can be kept e.g. 1. Where no separate books are kept and record joint venture transactions. 2. Where a separate set of books is kept to record the transaction. No Separate Book: When it is not possible to maintain a separate set of books for joint venture transaction cash party will use his ordinary business books for recording such transactions. Each party will open a joint venture account and the account of other parties in his books. Suppose A and B enter into a joint venture then B will open in his books a joint venture account and the account of A. Separate Books: The method considered so per in value the maintenance of accounts in respect of the joint venture in the book of the parties to the joint venture transactions can however, is recorded in a completely separate set of books under this method a separate joint books account is opened. The amount contributed by each partner as his share of his investment

3 2 in the joint venture is deposited in a joint bank account. Accounts of the parties concerned are also open in a separate set of books. Consignment The word consignment can be generally defined as the act of sending quality of goods by the manufacturers and the producer of one country or place to their agents in another place at the sick of principals for the purpose of sale. Explanation: Goods to send are known as a consignment the sender of the goods is called the consignor. Generally the manufacturers or the producer are the consigner. The person to whom goods are forwarded for the purpose of sale is known as the consignee. Goods sent on consignment don t become the pro party of the consignee. He has not bought them. The ownership remains with the sender or the consignor. If goods are destroyed, the consignee is not at all responsible. The loss will fall on the consignor. The consignee tries to sell the goods according to the instructions of the consignor. When the goods have been sold, he shall deduct his expenses, commission etc from the sale proceeds and the balance is remitted to the consignor. The relation between consignor and consignee is that of principal & agent. The consignor is the principal and the consignee is the agent. Distinguish between Consignment and Sale Consignment Legal owner ship: In case of a consignment of goods, the legal ownership of the goods is not transferred to the consignee. Relationship: In case of consignment, the relation between consignor and the consignee is that of a principal and an agent. Risks: In case of consignment, risk attached to the consignor till the consignee sells the goods consigned. Return of Goods: In case of consignment account sale, returns of goods are possible if the goods are not sold by the consignee. Account sale: In case of consignment, account sale is required to submit periodically by the consignor to the consignee. Sale In case of a sale of goods the legal ownership is transferred to the purchaser of goods. In case of sale of goods, the relation between seller and the purchaser of the goods is that of a creditor and debtor. In case of sale, risk attached the goods sold is transferred to the purchaser of goods. In sale, return of goods is not possible as goods once sold are not return able. In case of sale no account is required to be submitted by the purchaser to the seller. When the parts of goods remain unsold at the case of financial period When all the goods sent on consignment have not been sold and party of goods remain useless at the case of financial period the value of unsold useless goods in hands of the consignee must be ascertained and the profit or loss should be find out by taking this stock into account, for this purpose we will create stock on consignment account and this entry will passed. Stock on consignment A/C To consignment A/C xxx xxx

4 3 Stock on consignment account is an asset and will be shown in the balance sheet of the consignor. The valuation of sock lying with the consignee at the time of final closing of the account of the consignor is generally made at cost or market price Plus all expenses which are occurred to the move the goods from the consignor s premises to the premises of the consignee. Branch Account Why branch accounts are maintained: L.C Crapper calls branch accounts Departments conducted at a distance and William Pickles regards a branch as A section of business segregated physically from the main section. Several big business establishments have their branches scaled far and near. In a legal and expended business several branches of business in the other city are necessary, where it is essential that complete record be kept of the transactions relating to each branch, so that the head office prepare such accounts. Such records show the working results and each individual branch as well as the business as a whole. It is thus possible for the management to see which of the branches are working profitably and which requires also attention in order to secure better results. The question of branch s entrails is an important one which requires that the proper books of accounts and cash at record of all transaction be kept at head office in case of dependent branches and in case of independent branches. Proper record of stock should be kept on the branch. All types of goods supplied from the head office should be recorded separately showing quantity, saleable price and the goods sold each day. In case of credit sale, the record of each customer should be maintained in separate account to avoid buss as by reason of bad debts, the branch must furnish details as to the amount and age of the debts so that arrangement for collection may be made without loss of time. A firm which has branches would like to know the profit or loss made by at each branch can be ascertained easily. The above facts indicates that the branch accounts serve most important purpose on which the success and failure of whole business depends. Classification of Branches According to the nature branch and its working system of accounting designed and installed to record the branch transactions will very from business to business. However from the stand of accounting the branches may be divided in the following classes. A branch which receive goods only from the head office, sells goods only for cash, remits cash to the head office and the expenses of the branch are not remitted from head office. A branch similar to the above (1) Except that the goods are sold also on credit. (2) Except that the head office invoices that goods at selling price or cost plus profit. Independent branch: Branch which carries on its own purchases or manufactures and sells foreign branch. The first three types of branches don t keep the books of accounts. The head office does that branch are required to prepare statement of stock required, sold, refit cash statements. Branches that are allowed to make credit sells will also maintain accounts of credit customers.

5 4 Departmental Accounts Meaning of departmental accounts: Business is divided into a number of departments have to be kept in such a manner as to disclose not only trading result of the each department separately. Such accounts are known as Departmental Accounts. A big business establishment dealing in a large number of different kinds commodities is usually divided in a number of departments. Each department deal with a certain class of articles are separately managed all those departments are federated together by General Manager who maintains unity and co-ordination in its various departments. This form of departmental organization is today quite common in the big business concerns. Basis of allocation of expenses When the profit and loss account of each department is made the question of allocation of expenses raise; they count in this connection, has to divided which item of expenditure belongs to which department should be allocated to each of the department concerned for this purpose the expenses may be divided in following items may be treated as stated below. 1. Expenses incurred for the direct benefit of particular. Expenses incurred specially for a particular department should be charged to that department. Instances of such item are special advertisement, special insurance of stock, special departmental salaries etc, etc. 2. Expenses incurred for the benefit more then one department but which can be allocated to them on some obviously just principal the treatment of such expenses can be as follows. a. Expenses, which clearly depend upon sales, should be allocated on the basis of sales some times such expenses are allocated on the basis of number of units sold. b. Expenses on building and premises should be allocated according to area occupied. Such expenses will include rent and rate, insurance on building, repair etc. c. Lighting, heating etc. should be allocated on the basis of numbers of points unless metered separately. If numbers of points are not available, allocation can be made on the basis of area. d. Depreciation for each machine should be calculated separately and charged to department accordingly. e. Power unless metered separately, should be allocated according to the horse power of machine installed. f. Insurance premium should be charged to departments according to the value of subject matter incurred. g. Labor welfare expenses should be allocated according the basis of number of workers in each department. h. Advertising is usually allocated on the basis of sale. But should rather be allocated according the space devoted to each department. 3. Expenses incurred for the benefit of more then one department but which can not be allocated on some obviously just principle. The allocation of such expenses should be arbitrary. Salary paid to the manager, expenses of the Accounting Department etc, are the instances of this type of expenses. They have to be allocated according to the turn over, or the cost of goods sold, or the number of articles sold. 4. Expenses which can not be allocated in reasonable manner. Some times expenses like interest on capital, debenture interest, legal expenses, share transfer, office expenses and other lie items can not be satisfactorily allocated. In such a case no allocation should be

6 5 made, as nothing will be gained by an arbitrary allocation. Profits revealed by various departments are brought down in one account and these unallocated expenses should be debited there. Non departmental profit should also be credited in this account. Hire Purchase and Installments Account Hire Purchase Definition: The hire purchase system is a system under which the purchase is paid in number of installments as soon as the contract is entered into and the first installment is paid the hire purchaser acquires position (not the owner ship) of the goods. After the payment of the final installment the hire purchaser becomes the full fledged owner of the goods. So long as he does not become the owner, the installments paid by him are considered to be the payments for hire. In case the hire purchaser fails to pay any particular installment, the seller or vendor can take away the goods, and the installments already paid become forfeited. Thus, the essential features of a hire purchase system are a. The position of goods (not the owner ship) is transferred to the hire purchaser the goods remains the property of seller until the buyer as paid the entire installments. If default is made by the hire purchaser in payments, the seller can take away the goods. b. The hire purchaser is not forced to complete the whole transactions. If he so desires, the hire purchase agreement may be cancelled and the goods returned, but he will forfeit the installments he has paid. c. The hire purchaser is responsible for keeping the goods in good condition so long as they remain the property of the seller. d. As the seller retains the ownership of goods he must get them insured against loss or damage. Installment Purchase System It s the system, under which the purchase price has to pay by the purchaser in a number of periodical installments which easily resembles the hire purchase system, is called installments purchase system. Distinguish between Hire Purchase and Installment Purchase Hire Purchase The purchaser obtains the possession of the goods and begins to use the units but legally he does not become the owner of the corollas units until he pays the final installment. If the purchaser fails to pay any installment due and does not make arrangement payment in spite of reminding him, the vendor can take away the goods for his legally owner. The amount of installment price so far will be forfeited and treated as hire of the use of the goods. Installment Purchase In this case of the purchaser becomes owner of goods. The contract is enter into and he obtains the delivery of it and begins to use. In the vender system the vender can not relike to position of goods for he is no longer their owner. All that he can do is to use the purchases for the balance as to exercise an unpaid seller s loan the amount of paid installment can not be forfeited as deduction of goods sold. In other words seller can only say the purchaser for the balance of his bad debt, if the purchaser fails to pay any installments.

7 6 Share and Debenture Shares: Definition: Justice Farewell has defined share in the following word, A share is the interest of the share holder in the company, it is measured by the sum of money for the purpose of liability in the first place and of interest (dividend) in the second place a company s capital is divided into a number of equal parts called as a share. Nature of Share: a. The share of a company shall be movable property. It is transferable in the manner provided by the article of the company. b. The share capital non refundable except in the case of winding up and reduction of capital. c. Each share in a company shall have distinctive number. Class of Share: Before passing of the company ordinance 1948, a company use to issue three types of shares. 1. Ordinary Share. 2. Preference Share. 3. Deferred Share. The company s ordinance now allows the company to issue only one type of shares normally ordinary shares. 1. Ordinary Share: Are also called Equity Shares. The holders of ordinary or Equity Shares are the real owners of the company. The ordinary share holders have voting rights in the meetings of the company, they are entitled and receive dividend and are declared by the board of directors. The Equity Share capital can not be redeemed during the life of the company. 2. Preference Share: As the name suggest have certain preference on other types of shares. The preferences are as under. a. The first preference is for payment of dividend first paid to preference share holder. b. In case of winding up the company, the preference share holders have prior right in regard to repayment of capital. c. A fix rate of dividend is paid on preference share capital. 3. Deferred Share: Is also called Founder s Share were use to be issued to the promoters of the claims of all other share holders had been not the deferred share holders. Debentures: Definition: The Company s Ordinance explains debentures in the following words; Debentures includes Debenture Stock, bonds, terms, Finance Certificate(T.F.C) and any other security other then the share of a company with constituting a charge on the assets on the company or not. A company may raise part of its capital by obtaining loans in the form of debentures. Debenture means to owe a debt, debenture is a security issues or allotted to the interest under the seal of the company who become creditors of the company. A debenture may therefore be defined as a document issued by the company as an evidence of its debts. It contains a contract of the repayment of the principle sum of the interest at a specified date to the debenture holder. Kinds of Debentures: The debentures can be classified the basis of the terms and condition of their issue by the company.

8 7 1. Ordinary or Naked Debentures: The debentures, which are issued without any security for repayment, are known as Ordinary or Naked Debentures. 2. Mortgage Debentures: Mortgage Debenture is one, which is secured by a mortgage on the real property of the company. 3. Redeemable Debentures: The debentures, which are repayable at the state time, are called Redeemable Debentures. 4. Irredeemable Debenture: A debenture, which is not payable during the life time of the issuing company, is called Irredeemable Debenture. 5. Registered Debentures: A Registered Debenture id issued in the name of owner of the debenture. 6. Bearer Debentures: The Bearer Debentures, which does not show the name of owner the Bond. 7. Equipment Trust Debenture: The debentures, which are issued of raise funds for the purchase of new equipment of a business is called Equipment Trust Debenture. 8. Convertible Debentures: In certain cases, the company allows the debentures holders to count their debentures for the share of the company. Distinction between Shares and Debentures Share Debenture 1. Share Capital: The company s ordinance defines shares as a share in capital of the company. 2. Rights: The share holder receives dividends when the company earns the profit. They suffer financially when it suffers losses. 3. Voting: A share holder is entitled to vote at the company s general meeting. 4. Owner of the Company: The share holders except the Preference Share holders are the owner of the company. 5. Return of the Capital: The share holders are allowed to sale the share a will to other person but they are not paid back capital. 6. Management: The share holder manages the offers of the company through the created representatives called Board of Directors. 7. Payment at the Winding up: In case the company is wind up the share holder has a secondary claim of the return of money on the purchased shares. 8. Islamic Sprits: The dividend paid to the share holders depends upon the profit of the company. There is no fixed rate of return on the shares of the company. As much they are Islamic in character. A debenture is a certificate indebtedness Issued under the scale of the company. The right of debenture is to receive money at a fixed rate of interest. They can earn whit the profit or loss of company. The debenture holder has no rights of voting at any meeting of the company. The debentures are the creditors of the company and as such they have no claim on the ownership of the company. The company gives an undertaking to payback the capital along with the interest a stated time to the debenture. The debenture holders are not entitled to interfere in the management and the administration of the company as they are not the owner of the company. On winding up of the company, the first propriety is to payback the money to the debenture holder. The company has to pay fixed rate of interest to the bond holders whether the company makes any profit or suffer the loss, which is basically against the Islam.

9 8 Various methods of Redeeming Debentures Redemption of Debentures means to discharge the liability on account of debenture. Debentures may be redeemed out of profit, out of capital or out of provision made for redemption. A company can redeemed its debenture by any of the following method. 1. Redemption in Installment: A company may redeem its debenture in installment as per the term of the issue of the debenture. The term may be in any of the following forms. a. Redemption of fixed sum of debenture: The term of issued may provide that as a form of particular the company will be redeeming debenture of a fix amount. The decision about the holders whose money has to be return on be taking lottery methods or drawing a lot method. b. Redemption by purchase of debentures in the open market: A company may purchase its own debentures in the open market. The advantage of this method is that the company can redeemed the debenture at its convenience what debentures are purchased the company have to pay a higher or low price then the paid up value of its debentures. Any such profit or loss on redemption will be capital profit or loss. The debentures so purchased may be cancelled or may be kept as investment is may be utilized for re-issue when needed after wards. 2. Redemption by Conversion: In some case converting them into new share redeems debenture or debentures the term of issue may give the option to convert into share or debenture can be issued at per at premium or at discount. In case the new debentures are issued at premium, premium account is credited and discount account is debited. 3. Redemption in lump sum after the Expiry of a fixed period: The company may redeem the debenture in a lump sum after the expiry of a fixed period. Redemption in a lump sum involves high firms and therefore it will be appropriate for the company to make adequate provision for the funds of the redemption right from the very beginning. There are two methods of such provision; a. Creation of sinking fund or debenture redemption fund: Under this method every year a fix amount is taken from the profit and loss appropriation account. This amount is invested out side the business in creation of good securities are refined and the sale proceed are used for redeeming debentures usually the interest received on securities of sinking fund is also reinvested. This company earns compound interest sinking fund table are used for finding out which, if interest together with the interest in securities earning a fixed rate of interest will amount to the sum required for the redemption of debenture after the expiry of fixed period. b. Insurance Policy Method: Under this method the company may take an insurance policy for redemption of debentures in place of purchasing investment. The policy will be required data. The amount of premium will have to be paid in the beginning of the year. The question of getting interest does not arise at all and therefore, there will be no entry for interest.

10 9 Right Issue & Bonus Issue Right Issue Introduction: Right issue on invitation to the existing share holders so subscribe for further shares to be issued by accompany. A right simply means an option to buy certain securities at a certain specified period. A limited company having a share capital may increase its share capital by issuing new shares. Definition: Share so effected to the existing shareholders are called right shares as the existing shareholders of a public company have a first right of allotment of further shares. The offer of such shares to the existing shareholders is known as Privatized Subscription or Right Issue. Advantages of Right Issue Following are the specific advantages of this legal right to the existing share holders: 1. It ensures equitable distribution of share without disturbing the established equilibrium of shareholders. The contract of the company remains in the hand of the existing shareholders. 2. There is more certainty of the share being sold to the existing share holder at lower price then market price. 3. The expenses to be incurred if share is offered to the public are avoided. 4. It prevents the directors to issue new shares to their relatives and friends at lower price, on the other ensures that should get more controlling rights in the company. It better images of the company and stimulates response from share holders and the investment market. Bonus Issue Introduction & Definition: The term bonus means an extra dividend paid to shareholders in a joint stock company from surplus profit, when a company has accumulated a large fund out of profit much be on it needs the directors may divided to distribute a point of it amongst the shareholders in form of bonus. Bonus can be paid either in cash or in the form of share. Cash bonus is paid by the company when it has large accumulated profit as well as cash to pay dividend. May a time a company is not in a position or because it s adverse effects on the capital of the company. In such conditions, the free shares are issued, known as Bonus. Shares become permanently put of its issued share capital. From Company s view point: (a) As no cash is distributed liquidity isn t imposed. (b) The profit is permanently detail in the business by capitalizing the facilities expansion of business by employing such capital profit in the business. (c) The capital of the company as per its balance sheet will be more realization then it would be otherwise. From Shareholders view point: (a) The shareholders can receive dividend on the increased share holding. (b) The shareholders receive profit without in any way affecting the company s cash position, they can release cash by the sale of these shares in the market if they so desire.

11 10 (c) The shareholders stand to gain, since receipt of bonus share dividend results in tax advantages them to compare to cash dividend. Preparation of Final Accounts: Companies Under section 233 of the company s ordinance it has been made compulsory to prepare final account and present it at every annual meeting, section 233 reveals the following points in this regard. 1. Laying accounts before General Meeting: Under section 233 (1) of company s ordinance the Directors of every company are required to lay before the company in Annual General Meeting a Balance Sheet, Profit and Loss account or in the case of a company not trading for profit an Income and Expenditure account for the period. The first account must be presented at some date not later then the eighteen months after the incorporation of the company, subsequently once at least in every calendar year. 2. Audit of account: Under section 233 (3) the Balance Sheet and the Profit and Loss account or Income and Expenditure account shall be audited. The Auditor of the company and the Auditor s Report shall be attached. 3. Circulation of accounts: Under section 233 (4) every company shall be send a copy of such Balance Sheet and Profit and Loss account or Income and Expenditure account so audited together with a copy of the auditor s report and the Directors Report to the registered address of the every member of the company at last 21 days before the meeting at which such accounts and reports are to be presented. 4. Filing of Accounts: Under section 233 (5) every listed company shall also dispatch simultaneously five copies of each account and report to the authority, the Registrar and the Stock Exchange on which its quoted a non listed public company has however to file three copies of such accounts along with Auditor s and Directors Report with the Registrar of joint stock companies only. 5. Directors Report: Under section 236 the Directors Report is a point of company s annual accounts. This report shall contain the usual information regarding the efforts of the company its operations etc. However it shall also contain the full information and explanation with regards to any reservation, observation, qualification or adverse remarks made by the auditors in their report on the account of the company. Formation of Company The procedure for the formation of a joint stock company may be divided into four stages as follows. 1. Promotion Stage: First of all the idea of forming a company must be conceived either a person or a group of person who are called promoters. A person doing the necessaries floatation work of a company is called the promoter. Promoters are experts in company formation work. They may detail investigation to find out whether the idea is really profitable. They also to

12 11 decide about the total amount of capital required to start and to run the business. They have to prepare the necessary documents required to gain the incorporation certificate. 2. Incorporate Stage: A company is incorporated when it gets certificate of incorporation from the registrar of the companies. For this purpose following documents are to be filled by promoters of the company (i) Memorandum of Association (ii) Article of Association (iii) Notice and Address of head office (iv) List of directors (v) Consent of directors in written (vi) Directors contract of qualification to purchase shares (vii) Statutory declaration of fulfillment of legal conditions of incorporations. The documents (iv, v and vi) are not required for private companies. If the registrar is satisfied in all matters he shall issue the certificate of incorporation. The certificate is the conduce evidence that all the requirements in respect of registration have been compiled with, and now private company can start its business. 3. Raising of Share Capital: After the Incorporation of the public company, the directors will file a copy of the prospectus with the registrar. It is an invitation to the public for subscription. Investors can get the prospectus and application form free of charge from the company s bankers. They will submit the application along with the companies and directors will, and then precedes the allotment of the shares to the applications. 4. Trading or Business Commencement Certificate: A public company through incorporation can not begin its business unless it gets the Trading certificate. This will be issued by the registrar of the following declarations are filled by the company with the registrar. a. Declaration by the company that the minimum subscription amounts as per prospectus is satisfied. b. Declaration by the company that all the directors have taken up and paid for their qualification shares. c. Declaration by the company those all legal requirements precedent to commencement of business has taken up and paid for their qualification shares. Memorandum of Association Memorandum of Association is the basic document of a joint stock company. It is known as the Charter of the Company. It sets out the limits which outside, which the company must go. Its main purpose is to enable share holders, creditors and all those who deal with the company to know what its permitted range of enterprise is. The main clauses of the Memorandum of Association of a company limited by shares have been described in section 16, 17 and 18 of company s ordinance as under. Clauses/ Particulars of Memorandum: 1. Name Clause: The clauses state the name of the company. A company may adopt any name of the company but it should not be identical to the name of an ousting company registered at the registrar of the companies. The company s ordinance provides that the name of company must and with the word limited only if public company, and (private) limited if the private company. 2. Registered Office Clause: According to this clause the company must have a registered office at which all communication and notices are to be addressed. The memorandum will only state the name of the province where office is situated.

13 12 3. Object Clause: It is the most important clause in the memorandum. It clearly defines the phase of the company s activities. Any business activity carried outside the territories specified in the object clause of memorandum is altering view & view. 4. Liability Clause: This clause of memorandum contains a declaration that the liability of the share holders is limited to the extent of the value of shares holding by them. 5. Capital Clause: This clause is required to specify the amount of share capital with which the company proposes to be registered and secondly the division of the capital into shares of a fixed amount. 6. Subscription Clause: This clause contains a declaration by the subscribers that they are desirous of forming them selves into a company and agree with the number of shares written against their respective names. The subscriber is required to take at least one share each. Article of Association Meaning: Article of association is a legal document, second importance to memorandum of association. The Article of association is the regular ions or by laws governs internal organization and conduct of a company. The article of association describes the process of the directors the made and from in which changes in internal regulation of the company make from time to time be made. The article of association being subordinate to the memorandum of association can not go beyond the limit set by it. Content of Article: The main content of the Article of Association are as under: 1. Amount of share capital issue, transmission of share. 2. Rights of share holders regarding, voting, dividend and return of capital. 3. Rates regarding issuance of shares and debentures. 4. Procedure as well as regulation in respect of marking calls on shares. 5. Manner of transfer of shares. 6. Rates regarding appointment of directors, managing directors, agents, secretaries and treasures. 7. Number qualification, remuneration, powers and liabilities of directors. 8. Declaration of dividend. 9. Convincing and conduct of meeting with reference to notice quorum, poll, promo, resolution etc. 10. Rates regarding the forfeited and surrender of shares. 11. Matters relating to accountant audit. 12. Rates regarding the winding up the company. Amalgamation Amalgamation refers to the formation of a new company to purchase existing companies necessitating the winding up of the later. Some times two or more companies case amalgamation together for the sake of economy in working. A new company is framed to acquire and carry on business of all companies is called Amalgamation.

14 13 Absorption When an existing company takes over the business of their existing company it knows as the absorption. The company bought over goes into liquidation. The absorbed company will have no further separate existing. Absorption does not involve the formation of a new company but it does require the winding up of an existing company whose business is being purchased. Reconstructing The term Reconstruction is commonly used to describe scheme under which a company goes into liquidation for the expenses purpose of selling its assets to a new company for propriety paid shares carrying a further liability usually the liquidation. Company has exhausted its working capital and by mean such a scheme the company is reconstructed. Difference between Absorption, Amalgamation and Reconstruction Absorption Amalgamation Reconstruction There are two companies, one company sales its assets to another existing company. It either takes cash or shares of the existing company any or both for its existence. The object is to avoid connection and exchange profit by effecting economy and management. The creditors of the absorbed company may either be paid or purchasing company may take over the liabilities. There are two companies, both companies loss their existence by selling their concerns to a new company which is found by taking the assets of both. The object share gain is to reduce completion and exchange profits by effecting company in management. The creditors of both companies may either be paid or the purchasing company may take over the liabilities of both companies. Royalty There is only one company. It loss its existence by reducing its capital with the amount of loss shown in the balance sheet. It is reconstructed either by a new or by the old shareholders. Its object is to eliminate the loss accumulated during the past year and reconstruct it as a new company with the earning profit in the nature. The creditors of the company may either be paid or converted into debentures on the new company. Definition: When a person having an exclusive right of some sort transfers it to another in exchange for a certain amount calculated with reference to the quantity or sold much on amount is known as Royalty. Explanation: There are some person who posses an exclusive right over a mine in his territory. A patent holder has the exclusive right to produce things according to the patent. An author requires a copy right in his book and is alone authorized to print and sell it. This right can be exercised by its possessors or it can be sold to some person in exchange of definite amount which is known as royalty. In these cases, the person who surrender the right is known loser (land lord) and the person who take it known as lassie.

15 14 Minimum Rent or Dead Rent It is the minimum amount that must be paid by the lassie to the land lord in any particular year, whether the mine is worked or not at all. Usually there is a contract between the loser and lassie that in case of low out put or lower sale. This minimum amount is called Minimum or Dead Rent, it is also known as Fixed Rent, Sleeping Rent or Certain Rent. The dead rent is helpful rent as, thus to provide the land lord of regular income. It should however be noted that the question of dead rent arises only if the royalty falls short of dead rent. Short working When the Royalty is less then the dead rent, the difference is called Short Working. It can easily be defined at the excess of dead rent over the royalty, usually it is only during the course of a couple of initial years that short working take place. Recoupment of Short working Generally short working are carried forward and deducted from further surplus. Short working are usually recoupable within a limited period only i.e. within the life of lose. As long as short working are recoupable they are on asset should be shown in the balance sheet. Interim Dividend An interim dividend is a dividend declared before the close of a financial year of a company either out of accumulated profit brought forward from past years or anticipated profit of the ear rent year. In other words interim dividend is a dividend declared at any time between two ordinary general meetings. Interim dividend is only a payment on account of the whole dividend for the years. Before dividing on interim dividend the director must be careful to see that the profit already made sufficient, justify the payment of an interim dividend and interim financial account should be prepared which all would provision is respect of outstanding liabilities for expenses, depreciation etc share made although the account may disclose large profits. Marge or Merger of Companies It is also a term as amalgamation when to or more companies carrying on similar business amalgamate their concerns so that the combine capital may result in reducing expenses or that the combined capital may enable the carrying on the business more profitable or may help in avoiding disasters result of keen competition for other reasons. In amalgamation two or more companies carrying on business of a like nature combine together in form of a new company. The main object of Merger is to unite combined working by reducing establishment expenses.