What is a public company?

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Q. What is a public company?

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Concept understanding — Public Company Definition

Public Company – A First Look

Think of a business like a cricket team. A private company is like a club team – you need personal permission to join, and you can't sell your spot to just anyone. A public company is like an IPL franchise – anyone with money can buy a share (ticket) from the open market, and the team's performance is reported publicly.

That's the core intuition: a public company can raise money from the general public by issuing shares, and those shares can be freely traded on a stock exchange.

The Precise Meaning (NCERT Definition)

According to the Companies Act, 2013, a public company is defined under Section 2(71) as a company which:

Is not a private company
Has a minimum paid-up share capital of ₹5,00,000 (or higher as prescribed)
Can invite the public to subscribe to its shares or debentures
Has no restriction on the transfer of its shares
Must have at least 7 members (minimum) – no maximum limit
Must add "Limited" (Ltd.) at the end of its name

Note

A private company becomes a public company when it meets these conditions. The key difference is the ability to raise funds from the public and freely transfer shares.

Why It Matters

For a Class 12 student, understanding "public company" is crucial because:

Source of funds – It can raise huge capital from thousands of investors through Initial Public Offer (IPO).
Accounting complexity – More shareholders mean more legal requirements: separate Share Capital Account, Securities Premium Account, and detailed Profit and Loss Appropriation Account.
Dividend distribution – Profits are distributed as dividends to shareholders, which requires proper accounting treatment.
Legal compliance – Must prepare financial statements as per Schedule III of the Companies Act.

Accounting Treatment – The Core

When a public company issues shares, the accounting treatment depends on the stage:

1. On Receiving Application Money

When investors apply for shares, the company receives application money. The entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	X
To Share Application A/c		X
(Being application money received)

2. On Allotment of Shares

When shares are allotted, the application money is transferred to Share Capital:

Particulars	Debit (₹)	Credit (₹)
Share Application A/c Dr.	X
To Share Capital A/c		X
(Being application money transferred to share capital)

3. On Receiving Allotment Money

If allotment money is due and then received:

Particulars	Debit (₹)	Credit (₹)
Share Allotment A/c Dr.	Y
To Share Capital A/c		Y
(Being allotment money due)
Bank A/c Dr.	Y
To Share Allotment A/c		Y
(Being allotment money received)

4. On Calls (First Call, Final Call)

Similar treatment – each call is recorded separately:

Particulars	Debit (₹)	Credit (₹)
Share First Call A/c Dr.	Z
To Share Capital A/c		Z
(Being first call money due)
Bank A/c Dr.	Z
To Share First Call A/c		Z
(Being first call money received)

Important

All these accounts (Share Application, Share Allotment, Share Calls) are personal accounts – they represent amounts due from or received from shareholders. They are temporary accounts that get closed when the money is received and transferred to Share Capital.

The Share Capital Account Format (as per NCERT)

The Share Capital Account is a permanent account shown in the Balance Sheet under Equity and Liabilities. Here's the format:

Particulars	Amount (₹)
Authorised Capital
10,000 Equity Shares of ₹10 each	1,00,000
Issued Capital
8,000 Equity Shares of ₹10 each	80,000
Subscribed Capital
7,500 Equity Shares of ₹10 each	75,000
Called-up Capital
7,500 Equity Shares of ₹10 each (₹8 called-up)	60,000
Paid-up Capital
7,500 Equity Shares of ₹10 each (₹8 paid-up)	60,000
Less: Calls-in-Arrears	(2,000)
Net Paid-up Capital	58,000

Watch out

A common mistake: Students confuse Authorised Capital (maximum shares the company can issue) with Issued Capital (shares actually offered to public). They are NOT the same.

Profit and Loss Appropriation Account (for a Public Company)

When a public company earns profit, it must decide how to distribute it. The Profit and Loss Appropriation Account shows this:

Particulars	Amount (₹)	Particulars	Amount (₹)
To Transfer to General Reserve	10,000	By Net Profit (from P&L A/c)	1,00,000
To Proposed Dividend	40,000	By Balance b/d (Retained Earnings)	20,000
To Corporate Dividend Tax (if applicable)	8,000
To Balance c/d (Surplus)	62,000
Total	1,20,000	Total	1,20,000

Interest on Capital = Capital \times Rate \times Time Example: If capital is ₹5,00,000 at 10% p.a. for 6 months: Interest = 5,00,000 \times 10/100 \times 6/12 = ₹25,000

Key Takeaways for Exams

Public company ≠ Private company – Public can invite public subscription; private cannot.
Share Capital Account is a credit balance – it represents owners' equity.
All application/allotment/call accounts are debited when money is due and credited when received.
Calls-in-Arrears is a deduction from paid-up capital (shown as a negative).
Dividend is an appropriation of profit, not an expense – it appears in the Appropriation Account, not the Profit & Loss Account.

Important

For a public company, the minimum number of directors is 3 (vs. 2 for private). Also, a public company must issue a prospectus when inviting the public to subscribe – this is a legal document with full financial disclosure.

A public company, as defined under the Companies Act, 2013, is a company which is not a private company. In simpler terms, it is a company whose shares are freely transferable and which can invite the general public to subscribe to its shares or debentures.

The key distinguishing features of a public company are:

Feature	Public Company
Minimum Members	7
Maximum Members	No limit
Minimum Directors	3
Share Transfer	Freely transferable
Invitation to Public	Can invite the public to subscribe to its securities
Name	Must end with the word "Limited"
Prospectus	Must issue a prospectus or file a statement in lieu of prospectus before allotting shares

A public company must also obtain a Certificate of Commencement of Business before it can start its operations. It is subject to stricter regulatory compliance compared to a private company, including more detailed disclosures and mandatory appointment of independent directors.

✓Final answer

A public company is a company that is not a private company, has a minimum of 7 members and 3 directors, allows free transferability of shares, and can invite the general public to subscribe to its securities.

A public company is a company whose shares are freely transferable and which can invite the general public to subscribe to its shares or debentures. It must have a minimum of 7 members and a minimum paid-up capital of ₹5,00,000 (as per the Companies Act, 2013).

Concept and Accounting Treatment

A public company is defined under Section 2(71) of the Companies Act, 2013. The key distinguishing feature is that it can raise funds from the general public through an Initial Public Offering (IPO) or by issuing debentures. This is fundamentally different from a private company, which cannot invite the public to subscribe.

The accounting treatment for a public company is governed by the Companies Act and the Accounting Standards. When a public company issues shares, it must follow the prescribed procedure:

The application money is received and recorded in a Share Application Account (a liability account).
On allotment, the amount is transferred to Share Capital Account.
Calls are made in arrears or in advance, and separate accounts like Calls-in-Arrears Account and Calls-in-Advance Account are maintained.

The core rule: Debit what comes in, Credit what goes out (for cash transactions) and Debit the receiver, Credit the giver (for credit transactions). For share capital, the company is the receiver of money, so Share Capital Account is credited.

Key Requirements for a Public Company

Particulars	Requirement
Minimum number of members	7
Maximum number of members	No limit
Minimum paid-up capital	₹5,00,000
Transferability of shares	Freely transferable
Invitation to public	Can invite public to subscribe
Directors	Minimum 3
Name	Must end with "Limited"

Watch out

A common mistake is confusing a public company with a listed company. A public company may or may not be listed on a stock exchange. Listing is optional, but a public company can choose to get its shares listed.

Distinction from Private Company

Basis	Public Company	Private Company
Minimum members	7	2
Maximum members	Unlimited	200
Minimum directors	3	2
Share transfer	Free	Restricted
Public subscription	Allowed	Prohibited
Suffix in name	"Limited"	"Private Limited"

Tip

To quickly identify a public company in an exam problem, look for the words "Limited" or "Ltd." at the end of the company name, and check if the question mentions "invitation to public" or "public subscription."

Example Journal Entry for Share Issue

When a public company issues shares, the journal entry for receiving application money is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	10,00,000
To Share Application A/c		10,00,000
(Being application money received on 1,00,000 shares @ ₹10 each)

On allotment, the transfer entry:

Particulars	Debit (₹)	Credit (₹)
Share Application A/c Dr.	10,00,000
To Share Capital A/c		10,00,000
(Being application money transferred to Share Capital A/c)

✓Final answer

A public company is a company that can invite the general public to subscribe to its shares or debentures, has freely transferable shares, requires a minimum of 7 members and ₹5,00,000 paid-up capital, and must end its name with "Limited."

←Previous section · summarySummary →Next question · questions-for-practiceQ2 — What is a private company?

Q.What is a public company?

Concept and Accounting Treatment

Key Requirements for a Public Company

Distinction from Private Company

Example Journal Entry for Share Issue

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