Meaning

We know that an account in ledger format has two amount columns i.e. debit and credit amount columns. Now, most of the time, the total of debit and credit sides do not match.  The difference between their totals is called the balance of the account and it is posted on the shorter side. This result in equalling the total of both sides, hence this act is called ‘balancing an account.

Types of balances

Balancing an account is a very usual practice so that the balance of an account can be known. An account can have two types of balances:

• Debit balance, where the debit side total is more than the credit side total.
• Credit balance, where the credit side is more than the debit side total.

The balance of an account is posted on the shorter side. It means:

• The debit balance will be shown on the credit side as the credit side total is shorter. (posted as ‘By Balance c/d’)
• The credit balance will be shown on the debit side as the debit side total is shorter (posted as ‘To Balance c/d’)

Example

The following is a cash account that is not balanced:

We can see the debit side is ₹800 more than the credit side. It means there is a debit balance. It will be posted on the credit side as ‘By balance c/d’ to balance the account.

Exceptions

Balance of the income and the expense accounts (nominal accounts)are not computed. Instead, they are closed to trading account or profit and loss account to balance their amount totals. For example, the salaries account and sales accounts

Only the balance of the following types of accounts are computed and carried forwarded to successive accounting years:

• Assets
• Liabilities
• Capital

The balance of these accounts is shown on the trial balance and balance sheet as well.

No, capital account is not a real account.

Capital account represents the amount of money invested by the owner/owners of the business along with the retained earnings net of drawings or dividends. Capital account has a natural credit balance because it is an internal liability of the business.

Capital account is a personal account because, as discussed above, it represents the investment of the owner or owners. Personal account represents person or persons.

Whereas a real account represents the material assets of a business. Example:-  Cash A/c, Fixed assets A/c etc. That’s why the capital account is not a real account.

Being a personal account, the following golden rule of accounting applies to capital account:-

“Debit the receiver and credit the giver”

Here, as the owner gives an amount as an investment into the business (owner and the business are separate entities), the capital account has a credit balance.

Shareholders are the entities that hold some amount or number of shares of a company. As we know that ownership of a company is divided into its shares, a shareholder is actually a part-owner of a company.

By entity, it means a shareholder may be:

• An individual
• Any other company
• Any other incorporated entity
• Cooperative society
• BOI( Body of Individuals)
• AOP(Association of Persons)
• Artificial Juridical Person

The rights of shareholders depend on the type of shareholder one is.

Types of shareholders

1.   Equity Shareholders: By the term ‘shareholders’ we usually mean equity shareholders. They are permanent in nature i.e. they are not repaid the money they have invested into the company until the company is liquidated or wound up. Equity shareholders have the following rights:

• Right to have a share in profits made by the company. The profit made by a company, when distributed to its equity shareholders is known as a dividend.
• Right to vote on all resolutions to be passed in the Annual General Meeting of a company.
• Right to get repaid in event of winding up of the company. However, they are paid after meeting the obligations of outsiders and of preference shareholders.
• Right to transfer ownership of the shares. A shareholder may sell its shares to some willing buyer and cease to be a shareholder of a company.

2. Preference Shareholders: They are shareholders who are given preference regarding:

• Dividend
• Repayment at time of winding up

Unlike equity shareholders, they are not of permanent nature. Preference shares are redeemable i.e. they are to be repaid after a period which cannot be more than 20 years from the date of allotment of such shares (as the Companies Act, 2013). Also, a company cannot issue irredeemable preference shares. The rights of preference shareholders are as follows:-

• By preference as to dividend, it means preference shareholders have the right to receive a fixed dividend as a certain percentage on the nominal value of the share and that too before equity shareholders are paid.
• Right to get repaid at the date of redemption.
• If the company get liquidated before redemption of the preference shareholder, then they have the right to get repaid before equity shareholders.

3.  Differential Voting Rights Shareholders: These shareholders hold equity shares but with differential, right as to voting i.e. they may either have less voting rights or more voting right as compared to ordinary equity shares. Generally, DVR shares carry less voting power.

For example, a DVR shareholder gets 1 vote for 10 shares whereas an ordinary equity shareholder gets 10 votes for 10 shares i.e. one vote for every share. DVR shares issued to raise not only permanent capital but also prevent dilution of voting rights.

The rest of the right remains the same as the equity shareholders.