Introduction of Company Accounts | Book Keeping of Company Accounts

INTRODUCTION OF COMPANY

Meaning of Company

A company is a legal entity having an existence separate and distinct from that of its owners. In the eyes of the law, a company is an artificial person having many of the rights and responsibilities of a real person.

A Company, as a separate legal entity, may own property in its own name. Thus, the assets of a company belong to the company itself, not to the shareholders. A Company has legal status in court, that is, it may sue and be sued as if it were a person. As a legal entity, a corporation enters into contracts, is responsible for its own debts, and pays income taxes on its earnings.

A Company can be used to pool the savings of any number of investors, it is an ideal means of obtaining the capital necessary for large scale production. Nearly all large businesses and many small ones are in the form of corporations. "These are in fact, still more single proprietorships and partnerships than joint-stock companies, but in terms of volume of business activity and involvement of funds, companies hold an impressive lead. Because of the dominant role of the companies in our economy, it is important for everyone interested in business, economics, or politics to have an understanding of companies and their accounting practices. 

The growth of large companies has led to a demand for greater information about their profitability and financial affairs from persons outside the corporate enterprise. Virtually everyone buys goods and services produced by our major companies; a large number of people also work for these companies, or receive dividends from them, or sell materials and supplies to them. Thus, the general public and many special interest groups as well are concerned with the operations and financial stability of major companies. Among the specific groups of out-siders demanding accounting information from large companies are existing shareholders, prospective shareholders, creditors, banks. Labour unions, financial analysts, consumer groups, government agencies, and new media of all types.

Advantages of a Company

The company offers a number of advantages not available in other forms of business organizations. Among these advantages are the following:

No Personal Liability for the Shareholders

Creditors of a company have a claim against the assets of the company, not against the personal property of the stockholders. Thus, the amount of money, which the shareholders risk by investing in a company, is limited to the amount of their investment. To many investors, this is the most important advantage of the corporate form.

ii. Ease of Accumulating Capital

The ownership of a company is evidenced by transferable shares of stock. The sale of corporate ownership in units of one or more shares permits both large and small investors to participate in the ownership of the company. Some corporations actually have more than a million individual shareholders. For this reason, large companies are often said to be publicly

Of-course not all companies are large. Many small businesses are organized as companies and are owned by a limited number of shareholders. Such companies are said to be closely held. ii. Ownership Shares are Readily Transferable

Shares of companies may be sold by one investor to another without dissolving of disrupting the business organization. The shares of most large companies may be bought or sold by investors in organized markets, such as a Karachi, Lahore and Islamabad Stock Exchanges, etc. Investments in these shares have the advantage of liquidity, because investors may easily convert their corporate ownership into cash by selling their stock are their market price.

Continuous Existence

A Company is a separate legal entity with perpetual existence. The continuous life of the company despite changes in ownership is made possible by the issuance of transferable shares of stock. By way of contrast.

a partnership is a relatively unstable form of organization, which is dissolved by the death, or retirement of any of its members. The continuity of the corporate entity is essential to most large-scale business activities. Professional Management

Stockholders own the company, but they do not manage it on daily basis. To administer the affairs of the company, the shareholders elect a board of directors. The directors, in turn, hire a president and other corporate officers to manage the business. There is no mutual agency if a company, thus, an individual shareholder has no right to participate in the management of the business unless he or she has been hired as a corporate officer.

Disadvantages of a Company

Among the disadvantages of the company are:

1- Heavy Taxation

The income of a sole proprietorship and partnership are taxable only as personal income to the owners of the business. The income of the company, on the other hand, is subject to income taxes, which must be paid by the company itself. The combination of various taxes often takes a greater part of a company's income. If a company distributes its earnings to shareholders, the shareholders must pay personal income taxes on the amount they receive. This practice of first taxing corporate income to the company and then taxing distributions of that income to the shareholders is commonly called double taxation.

2- Greater Regulation

A Company comes into existence under the terms of laws and the same laws may provide for considerable regulation of the company’s activities. For example, the withdrawal of funds from a company is subject to certain limits set by the law. Pakistan Securities Commission controls the overall operations of companies in Pakistan under Companies Ordinance 1984 and various other regulations issued by the P.S.C.

3-   Separation of Ownership and Control

The separation of the functions of ownership and management may be an advantage in some cases but a disadvantage in some other cases. On the whole, the excellent record of growth and earnings in most large companies indicates that the separation of ownership and control has benefited rather than injured the shareholders. In a few instances, however, a management group has chosen to operate ai company for the benefit of the insiders. The shareholders may find it difficult in such cases to take the concerted action necessary to oust the officers. Thus various, malpractices in operating the affairs of the company are beyond the control of the shareholders.