Select the correct statements from the following: A. Preference Share Capital is a part of Share Capital. B. Preference Share Capital is a part of Non-Current Liability. C. Preference Share Capital is a Current Liability. D. Preference Share-holders do not have voting rights. E. Preference Share Capital is repaid before the payment of Equity share-holders in case of winding up of the company. Choose the correct answer from the options given below:
A, D and E only
Understanding Preference Share Capital Statements
Let's analyze each statement regarding Preference Share Capital to determine which ones are correct.
Statement A: Preference Share Capital is a part of Share Capital.
This statement is correct. Share Capital of a company typically consists of two main types: Equity Share Capital and Preference Share Capital. Both represent funds contributed by the owners (shareholders) of the company.
Statement B: Preference Share Capital is a part of Non-Current Liability.
This statement is incorrect. Share Capital, whether equity or preference, is classified under Shareholders' Funds or Owner's Equity in the balance sheet, not as a liability. Liabilities represent obligations to external parties, while share capital represents the owners' stake in the business.
Statement C: Preference Share Capital is a Current Liability.
This statement is incorrect for the same reason as Statement B. Share Capital is part of Shareholders' Funds (Equity), not a liability. Current liabilities are short-term obligations typically due within one year.
Statement D: Preference Share-holders do not have voting rights.
This statement is generally correct. Unlike equity shareholders who have voting rights on most matters concerning the company, preference shareholders typically do not have voting rights in the general meetings of the company. However, they may be granted voting rights under specific circumstances, such as on matters directly affecting their rights or if the company fails to pay their fixed dividends for a specified period.
Statement E: Preference Share Capital is repaid before the payment of Equity share-holders in case of winding up of the company.
This statement is correct. One of the key preferential rights of preference shareholders is that they have a claim on the company's assets before equity shareholders in the event of the company's winding up or liquidation. Their capital is repaid first after the claims of creditors have been settled.
Summarizing Correct Preference Share Capital Statements
Based on the analysis:
- Statement A is correct.
- Statement B is incorrect.
- Statement C is incorrect.
- Statement D is correct.
- Statement E is correct.
Therefore, the correct statements are A, D, and E.
Revision Table: Preference vs. Equity Shares
| Feature | Preference Shares | Equity Shares |
|---|---|---|
| Voting Rights | Generally no voting rights (except in specific cases) | Voting rights on most matters |
| Dividend | Fixed rate dividend; preferential right to receive dividend | Variable dividend (depends on profit); paid after preference dividend |
| Repayment of Capital (Winding up) | Preferential right over equity shareholders | Paid after preference shareholders |
| Nature | Often seen as having features of both debt and equity | True owners of the company; bear the most risk |
Additional Information on Share Capital Classification
Share capital is a fundamental component of a company's capital structure. It represents the initial and subsequent investments made by the owners. It is listed under the equity section of the balance sheet, not as a liability.
- Share Capital: The total amount invested by shareholders. Comprises Equity Share Capital and Preference Share Capital.
- Equity Share Capital: Represents the ordinary ownership in the company. Equity shareholders are residual claimants, meaning they receive profits and assets only after all other claims (including preference shareholders and creditors) are settled. They have voting rights.
- Preference Share Capital: Represents a special class of share capital that carries certain preferential rights over equity shares, typically regarding dividend payment and repayment of capital during winding up. They usually do not have voting rights.
- Liabilities: Obligations of the company to external parties (like banks, suppliers, employees). These are distinct from share capital (equity). Liabilities can be current (due within a year) or non-current (due after more than a year).
Understanding the distinction between share capital (equity) and liabilities is crucial for interpreting a company's financial health.
Important Questions from Accounting for Share Capital
Arrange the following in the correct order:
(A) Subscribed Capital
(B) Issued Capital
(C) Authorised Capital
(D) Paid-up Capital
(E) Called-up Capital
Choose the correct answer from the options given below:
Libraries run by charitable trusts are an example of:
Oversubscription is a situation where the:
Match List-I with List-II and choose the correct answer from the options given below:
List-I
(Name of account to be debited or credited, when shares are forfeited)List-II
(Amount to be debited or credited)(A) Share Capital Account (I) Debited with amount not received (B) Share Forfeited Account (II) Credited with amount not received (C) Calls-in-arrears Account (III) Credited with amount received towards share capital (D) Securities Premium Account (IV) Debited with amount called up 400 shares of ₹ 50 each issued at par were forfeited for non-payment of final call of ₹ 10 per share. These shares were reissued at ₹ 45 per share as fully paid-up. The amount transferred to capital reserve is:
