21.5. Only profit in the form of dividend will be paid to share holders. The
original amount subscribed by the share holders will not be paid up until the
company is closes down. Therefore, the funds of the share holders are a
permanent finance of a company. This is shown as liability in the Balance
Sheet, as this amount is owed by the company to its shareholders. The
company will not pay interest on the funds of the share holders, but
compensates them in the form of dividends.21.6. There may be different classes of shares. But we are concentrating on
ordinary shares and preference shares.21.7. If the company is to wound up, the ordinary share holders will get their claim
settled only after all the creditors and other investors get their claims settled.
Preferential share holders will have priority over their ordinary shareholders.
This is because the ordinary share holders are the real owners of the
company.- Capital Reserve
22.1. Sometimes the revaluation of fixed assets shows increased value. This is
called capital revenue. They may be in form of cumulative totals
(accumulated from year to year) upto the end of the period in the balance
sheet.22.2. A company must obtain legal clearance to issue shares up to certain amount.
This is called “capital authorized”. A company can issue shares up to the
amount of ‘capital authorized’. Normally, a company floats shares much
below the amount of ‘capital authorized’. Out of shares floated by the
company, the amount actually contributed by the shareholders is called the
“capital issued and subscribed”.Points to note:
Only in case a company is to be wound up, does the question of liability to return
shareholders funds arise. The dividends to share holders will not be paid from capital
reserve, but may be paid out from revenue reserve.
Apart form paying dividends to share holders, out of net profit, a company will try to
retain some portion of the profit arising from its normal operations. This is called
Revenue Reserve. This revenue reserve may be used for (a) future expansion plans or (b)
to pay dividend for those years, when there is less or no profit or to simply maintain
consistency in payment of dividends and thereby maintain credibility in the minds of the
shareholders.