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Corporate accounts- share capital

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  • 1. INTRODUCTION Two major limitations of sole proprietorship concerns and partnership firms are: 1. Inadequacy of funds 2. Unlimited Liability To overcome these limitations, one of the most convenient form of organization was formed called JOINT STOCK COMPANY In India, joint stock companies are governed by provisions of the Companies Act, 1956
  • 2. COMPANYAccording to section 3 (1)(i) of the Companies Act,1956 “A company formed and registered under this Act or an existing company.” CHARACTERISTICS: 1.Incorporated Association 2. Separate legal entity 3. Limited Liability 4. Separate property 5. Perpetual succession 6. Transferability of shares
  • 3. KINDS OF COMPANIES
  • 4. DIFFERENCE B/W PRIVATE COMPANY AND PUBLIC COMPANY Basis Private Company Public Company 1. No. of members Minimum: 2 Maximum: 50 Minimum: 7 Maximum: Unlimited 2. Issue of prospectus Cannot issue prospectus Must issue prospectus 3.Transfer of shares Restricted Freely transferable 4. Commencement of business Can commence after getting Certificate of Incorporation Can commence after getting the Certificate of Commencement 5. No. of Directors At least two At least three 6. Quorum for meetings Quorum is two Quorum is five 7. Use of word ‘Limited’ ‘Private Limited’ must be used at the end of the name ‘Limited’ must be used at the end of the name
  • 5. DOCUMENTS REQUIRED FOR FORMATION OF A COMPANY Memorandum of Association Articles of Association A Statement of the Nominal Capital A List of Directors Written consent of Directors Notice of Address of the Registered Office A Statutory Declaration
  • 6. DIVISIONS OF SHARE CAPITAL Amount of capital with which the company intends to be registered Nominal or Registered Capital The part of authorized capital which is offered to the public for subscription Issued Capital That part of the issued capital for which applications are received from the public Subscribed Capital The potion of the subscribed capital which is called up by the company Called-up Capital The part of called up capital which is actually paid by the members Paid-up Capital A part of share capital which has not been called up and shall not be capable of being called up except in the event of winding up of the company Reserve Capital
  • 7. DIFFERENCE B/W RESERVE CAPITAL AND CAPITAL RESERVE Basis Reserve Capital Capital Reserve 1. Nature It is a part of uncalled capital It is the accumulated profit, e.g., gain on sale of fixed assets, gain on forfeited shares, etc. 2. Disclosure It is usually not shown in the Balance Sheet. A note may be given for this It is shown in the liabilities side of Balance Sheet under the heading Reserve and Surplus 3.Time of Receipt Being uncalled capital, the amount is receivable only at the time of liquidation The amount of capital reserve is already received 4. Usage It issued only at the time of liquidation of the company, if required This is used to write off all the capital losses or for issue of bonus shares, etc.
  • 8. TYPES OF SHARES Preference Shares Cumulative Preference Shares Non cumulative Shares Redeemable Preference Shares Participating or non- participating Preference Shares Equity Shares
  • 9. DIFFERENCE B/W SHARES AND STOCKS Basis Shares Stocks 1. Payment Fully paid up or partially paid-up Fully paid-up 2. Issue May be issued when a company is incorporated Only fully paid up shares can be converted to stock 3.Transferability Shares cannot be divided below face value Shares can be divided below face value 4. Numbering Are serially numbered Cannot be numbered 5. NominalValue Are of equal nominal value Divided into unequal amounts 6. Denomination Generally of equal denomination Of unequal denomination
  • 10. BOOK BULIDING • SEBI guidelines, 1995 defines book building as a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built- up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document. Book building process is a common practice used in mo st developed countries for marketing a public offer of equ ity shares of a company. However, book building is a transparent and flexible price discovery method of initial public offerings(IPOs) in which price of securities is fixed by th e issuer company along with the Book Running Lead Manager (BRLM)on the basis of feedback received from investors as well as market intermediaries during a certain period. BOOK BUILDING
  • 11. JOURNAL ENTRIES FOR ISSUE OF SHARES Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Bank A/c Dr. To Share Application A/c (Being application money received) Share Application A/c Dr. To Share Capital A/c (Being application money transferred) Share Allotment A/c Dr. To Share Capital A/c (Being share allotment money due) Bank A/c Dr. To Share Allotment A/c (Being allotment money received)
  • 12. Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Share 1st Call A/c Dr. To Share Capital A/c (Being 1st call due) Bank A/c Dr. To Share 1st Call A/c (Being 1st call money received) Share Final Call A/c Dr. To Share Capital A/c (Being share final call money due) Bank A/c Dr. To Share Final Call A/c (Being final call money received)
  • 13. QUESTION - 1 ABC Ltd. invited applications for 1000 shares of Rs.10 each on 1st January, 2002. The payments to be made as follows: Rs.3 on application; Rs.3 on allotment; Rs.4 on 1st call The issue was fully subscribed and the amounts due on allotment and first call have been received.
  • 14. ISSUE OF SHARES AT A PREMIU (SECTION 78) A company may issue shares at a premium i.e., at a value greater than its face value. According to SEBI, Only a company with a 5-year track record of consistent profitability, it will be free to price its issue provided: The participation of the promoting companies is not less than 50% of the equity of the new company The issue price is made applicable to all new investors uniformly The prospectus contains justification for issue price Securities premium cannot be utilized for payment of dividend
  • 15. PURPOSES FOR WHICH SECURITIES PREMIUM MAY BE APPLIED BY THE COMPANY: Issue of fully paid up bonus shares Writing off preliminary expenses Writing off the expenses of the commission paid or discount allowed on any issue of shares or debentures Providing premium payable on the redemption of any redeemable preference shares or debentures For purchase of its own shares (buyback) [Sec 77A]
  • 16. • If premium is paid with application money. Then the following entry will be passed: • If premium is paid with application money. Then the following entry will be passed: Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Share ApplicationA/c Dr. To Share Capital A/c To Securities Premium A/c Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Share Allotment A/c Dr. To Share Capital A/c To Securities Premium A/c
  • 17. EXAMPLE 2 ABC Ltd. invited applications for 1000 shares of Rs.10 each at a premium of Rs.2 on 1stJanuary, 2002. The payments to be made as follows: Rs.3 on application; Rs.5 on allotment (including premium); Rs.4 on 1st call The issue was fully subscribed and the amounts due on allotments and first call have been received. Pass necessary Journal Entries.
  • 18. ANSWER:
  • 19. ISSUE OF SHARES AT A DISCOUNT (SECTION 79) A company can issue shares at discount i.e., value less than the face value subject to the following conditions: • The issue of shares at a discount is authorized by a resolution passed by the company in general meeting and sanctioned by the Central Govt • The resolution must specify the maximum rate of discount which should not exceed 10% of the nominal value of shares or such higher percentage as the Central Govt may permit • One year must have elapsed since the date at which the company was allowed to commence business • Shares issued at a discount must belong to a class of shares already issued • Issue must take place within two months after the date of sanction by the court or within such extended time as the court may allow • Every prospectus relating to the issue of shares and every balance sheet after the issue of shares should contain the particulars of the discount allowed and so much of the discount as has been written off
  • 20. • It can be thus concluded that shares cannot be issued at discount if: It is a new company Shares issued are of a new class even though issued by an old company • Journal Entry to be passed: • Discount on issue of shares will be shown under miscellaneous head on the assets side of the Balance Sheet till its completely written off from the P&L A/c Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Share Allotment A/c Dr. Discount on Issue of Shares A/c Dr. To Share Capital A/c
  • 21. Over subscription of Shares When applications received exceed the number invited, the share is said to be over-subscribed. It also means that the company received more application money than what was originally invited. 1). If the excess amount is refunded to applicants 2). If the excess amount is adjusted to Allotment Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Share ApplicationA/c Dr. To Bank A/c Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Share ApplicationA/c Dr. To Share Allotment A/c
  • 22. EXAMPLE 3 On 1st January 2003 ABC Ltd. invited applications for 1000 shares of Rs. 10 each.The payments to be made as follows: Rs.3 on application Rs.3 on allotment Rs.4 on 1st call Applications have been received for 1200 shares. Excess applications have been rejected. Allotments were made.The full amounts collected in due course. Pass necessary Journal Entries to record the above.
  • 23. Under subscription The company has received less number of applications than what was invited. In case of under subscription the company will proceed to allotment with whatever number of shares applied by the public. EXAMPLE 4 • On 1st January 2003 ABC Ltd. invited applications for 1000 shares of Rs. 10 each.The payments to be made as follows: • Rs.3 on application; Rs.4 on allotment; Rs.3 on 1st call • Applications have been received for 900 shares. Allotments were made. The full amounts collected in due course. • Pass necessary Journal Entries to record the above
  • 24. Calls in advance Sometimes shareholders chose to pay the call money in advance which should be credited to calls in advance account. Oversubscription of issue is another reason for opening Calls in Advance Account Interest is paid on the calls in advance if it is specified in the in the Articles of Association of the company or if the company adoptsTable A for internal administration interest can be paid at the rate of 6%.
  • 25. ENTRIES : • Interest Due • Interest Paid Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Interest on Calls in Advance A/c Dr. To Sundry Shareholders A/c Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Sundry Shareholder’s A/c Dr. To Bank A/c
  • 26. EXAMPLE 5 ABC Ltd. invited applications for 1000 shares of Rs.10 each on 1st January, 2002. The payments to be made as follows: Rs.2 on application; Rs.3 on allotment; Rs.5 on 1st call The issue have been fully subscribed. Mr. A, who is allotted 300 shares, paid the full amount at the time of allotment.The amounts due on allotment and first call have been received. Pass necessary Journal Entries.
  • 27. Calls in arrear Sometimes shareholders fail to pay the amount due on calls. In that case we have two options in passing the journal entry. • Recording the actual amount collected to the respective call account.The unpaid amount will remain in the books in the call account as debit balance • Debit the Bank account for the amount received and debit the Calls in Arrears Account for the unpaid amount and credit the respective call account for the total. The company can charge interest on calls in arrears at 5% per annum if it is specified in the Articles of Association or if the company adoptsTable A for the internal administration.
  • 28. EXAMPLE 6 ABC Ltd. issued 1000 shares of Rs.10 each on 1st January, 2002.The payments to be made as follows: Rs.2 on application; Rs.3 on allotment; Rs.5 on 1st call The issue have been fully subscribed. Mr. A, who is allotted 300 shares failed to pay the 1st call amount.The full amounts due on allotment and first call from all other shareholders have been received. Pass necessary Journal Entries
  • 29. ANSWER:
  • 30. Issue of share for consideration other than cash Company can issue shares in consideration of purchase of assets. Following journal entries are passed for such issue: Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. a) AssetA/c Dr. ToVendor’s Account (Asset purchased) b) Vendor’s Account Dr. To Share Capital (Shares issued in consideration of asset)
  • 31. EXAMPLE 7 On 1st January 2002, ABC Ltd. Purchased a building for Rs.99,000 from Deepa constructions, for which they issued equity shares at the par to the vendor. Pass necessary journal entries.
  • 32. EXAMPLE 8 On 1st January 2002, ABC Ltd. purchased a building for Rs.99,000 from Deepa constructions, for which they issued equity shares at a discount of 10% to the vendor. Pass necessary journal entries.
  • 33. EXAMPLE 9 On 1st January 2002, ABC Ltd. purchased a building for Rs.99,000 from Deepa constructions, for which they issued equity shares at a premium of 10% to the vendor. Pass necessary journal entries
  • 34. Forfeiture of shares- Accounting treatment If a shareholder has not paid any call on the day fixed for payment thereof and fails to pay it even after his attention drawn to it by the secretary by registered notice, the Board of Directors pass a resolution to the effect that such shares be forfeited. Shares once forfeited become the property of the company and may be sold on such terms as directors think fit.
  • 35. JOURNAL ENTRIES: • Forfeiture of shares issued at par Share Capital Account Dr. (called up value of shares forfeited) To Share ForfeitureAccount (paid up portion of forfeited shares) To Calls in arrears (the unpaid amount of the respective calls)
  • 36. EXAMPLE 9 ABC Ltd. invited applications for 1000 shares of Rs.10 each on 1st January, 2002.The payments to be made as follows: Rs.3 on application; Rs.3 on allotment; Rs.4 on 1st call The issue have been fully subscribed.The amounts due were collected for allotment and 1st call with the exception of Mr A, having 300 shares who failed to pay for the allotment and first call.These shares have been forfeited. Pass necessary Journal Entries.
  • 37. ANSWER:
  • 38. Forfeiture of shares issued at premium a. Where premium was collected Share CapitalAccount Dr. (the capital value) Securities Premium Account Dr. (the premium on forfeited shares) To Share Forfeiture Account (the amount collected on shares) ToVarious Calls Account (the unpaid amount on shares)
  • 39. EXAMPLE 10 ABC Ltd. invited applications for 1000 shares of Rs.10 each at a premium of Rs.2 per share on 1st January, 2002.The payments to be made as follows: Rs.3 on application; Rs.5 on allotment (including premium); Rs.4 on 1st call The issue have been fully subscribed.The amounts due were collected with the exception of Mr. A, who is allotted 300 shares and failed to pay for the allotment and first call.These shares have been forfeited. Pass necessary Journal Entries
  • 40. • b. where premium not collected Share CapitalAccount Dr. (only the capital value) To Share Forfeiture Account (capital collected on shares) ToVarious Calls Account (capital unpaid amount on shares) • EXAMPLE 12 ABC Ltd. invited applications for 1000 shares of Rs.10 each at a premium of Rs.2 per share on 1st January, 2002.The payments to be made as follows: Rs.3 on application; Rs.5 on allotment (including premium); Rs.4 on 1st call The issue was fully subscribed.The amounts due were collected with the exception of Mr. A, who is allotted 300 shares and failed to pay for the first call.These shares have been forfeited. Pass necessary Journal Entries.
  • 41. ANSWER:
  • 42. • Notice here that the calls in arrears account contains only unpaid capital. No unpaid premium.. Therefore there is no need of debiting the Premium Account.You can close the unsettled account by just reversing the Capital Account alone.
  • 43. Forfeiture of shares issued at discount When shares issued at discount are forfeited, the discount account must be reversed irrespective of the point at which default occurs.This is because the capital account itself includes discount in it. Share Capital Account Dr. (the value of shares) To Discount (amount of discount allowed on shares) ToVarious Calls (amount unpaid on calls)
  • 44. EXAMPLE 14 ABC Ltd. invited applications for 1000 shares of Rs.10 each at a discount of Re.1 per share on 1st January, 2002. The payments to be made as follows: Rs.3 on application; Rs.2 on allotment; Rs.4 on 1st call The issue have been fully subscribed.The amounts due were collected with the exception of Mr. A, who is allotted 300 shares and failed to pay the allotment and first call.These shares have been forfeited. Pass necessary Journal Entries
  • 45. ANSWER:
  • 46. Re-issue of Forfeited Shares • Forfeited shares may be reissued by the directors of the company for any amount but if such shares are issued at a discount then the amount of discount should not exceed the actual amount received on forfeited shares plus original discount on reissued shares, if any. • The following entry is passed: BankA/c Dr. (Amount received on such reissue) Discount on Reissue of Shares A/c Dr. (with original rate of discount and if the shares originally were issued at a discount) Shares Forfieted A/c Dr. (Loss on reissue of shares) To Share Capital A/c (With face value of shares) To Securities Premium A/c (If shares are reissued at a premium)
  • 47. EXAMPLE 15 X Ltd. Invited applications for 10,000 shares of Rs.100 each at a discount of 6% payable as follows: On application Rs.25 On allotment Rs.34 On first and final call Rs. 35 The applications were received for 9,000 shares and all of these were accepted.All money due was received except the first and final call on 100 shares which were forfeited. 50 shares were reissued @ Rs.90 as fully paid. Pass entries in the journal.
  • 48. ANSWER: Serial No. Particulars Dr. Balance Cr. Balance Rs. Rs. Bank A/c Dr. To Share Application A/c (Being application money received) 2,25,000 2,25,000 Share Application A/c Dr. To Share Capital A/c (Being application money transferred) 2,25,000 2,25,000 Share Allotment A/c Dr. Discount on Issue of Shares A/c Dr. To Share Capital A/c (Being share allotment money due) 3,06,000 54,000 3,60,000 Bank A/c Dr. To Share Allotment A/c (Being allotment money received) 3,06,000 3,06,000
  • 49. Particulars Dr. Balance Cr. Balance Rs. Rs. Share 1st & Final Call A/c Dr. To Share Capital A/c (Being 1st call due) 3,15,000 3,15,000 Bank A/c Dr. To Share 1st Call A/c (Being 1st call money received) 3,11,500 3,11,500 Share Capital A/c Dr. To Share 1st & Final Call A/c To Discount on Issue of Shares A/c To Shares Forfeited A/c (Being 100 shares forfeited) 10,000 3,500 600 5,900 Discount on Issue of Shares A/c Dr. Shares Forfeited A/c Dr. To Share Capital A/c (Being 50 shares reissued) 300 200 500 Shares Forfeited A/c Dr. To Capital Reserve A/c (Being profit on reissue transferred) 2,750 2,750