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
Nawab, Shanaya, and Hritik are partners sharing profits and losses in the ratio of 5 : 3 : 2. The partnership deed provides for charging interest on drawings @10% p.a. The drawings of Nawab, Shanaya, and Hritik were ₹20,000, ₹15,000, and ₹10,000, respectively. After final accounts have been prepared, it was discovered that interest on drawings had not been charged. The adjusting entry will be:
Mr. Kunal withdrew ₹10,000 per month at the end of each month from a firm for his personal use during the year ending March 31, 2022. What will be the interest on drawings if charged @8% p.a.?
What are the accounting aspects that are involved at the time of retirement or death of a partner?
(A) Ascertainment of profit or loss up to the date of retirement or death of partner.
(B) Realisation of assets and liabilities that are shown in the books of Accounts only.
(C) Adjustment of capital.
(D) Calculation of new profit sharing ratio and gaining ratio.
(E) Treatment of Goodwill
Choose the correct answer from the options given below:
On retirement of a partner, the retiring partner’s capital account will be credited with:
Which of the following are shown in Revaluation A/c?
(A) Unrecorded Asset
(B) Workmen Compensation Reserve
(C) Decrease in fixed Asset
(D) Increase in Inventory
(E) Drawings of partner
Choose the correct answer from the options given below:
