Accounting for share capital

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Accounting For Share Capital
M. C. Sharma
Associate Professor, Deptt. Of Commerce
Shaheed Bhagat Singh Evening College
(University of Delhi)
Delhi
Email:m_c_sharma@yahoo.com
Prof. M. C. Sharma M: 9717415641

Meaning and Definition of A Company
 According to Section 2(20) of the Companies Act
2013:
“Company” means a company incorporated under the
Act (of 2013) or under any previous company law.
 According to Chief Justice Marshal (USA):
“A company is a person artificial, intangible and existing
only in the eyes of law. Being a creature of law, it
possesses only those properties which the charter of its
creation confers on it either expressly or incidental to its
very existence. It has no physical existence but exists
only in contemplation of law.”
Prof. M. C. Sharma M: 9717415641 2

Kinds of Companies
 Company limited by guarantee [Section 2(21)]
 Company limited by shares [Section 2(21)]
 Unlimited Company [Section 2(92)]
 Private Company [Section 2(68)]
 Public Company [Section 2(71)]
 Government Company
 Foreign Company
 Companies with Charitable objects
 One person company (OPC)
 Holding and Subsidiary Company
 Statutory Companies
Prof. M. C. Sharma M: 9717415641 3

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Shares – Meaning and Types
 What is a share?
 Capital of a company is divided into units or
parts of equal amount. Every unit/part is
called a share.
 According to Section 2(84) of the Companies
Act, a ‘share’ means a share in the share
capital of a company and includes stock.
 It is an ownership security.

Types of Shares
 Preference Shares
 Equity Shares:
a. Equity shares issued by a Company limited by
shares to public or its members [Section 43]
b. Sweat Equity Shares [Section 2(68)]
Prof. M. C. Sharma M: 9717415641 5

Types of Shares (Contd.)
Preference Shares
Preference shares are those shares which carry the
following preferential rights:
1.the right to receive divided at a specified rate
before any dividend is paid on the equity shares,
and
2.the right to repayment of capital before anything is
paid to equity shareholders.
Prof. M. C. Sharma M: 9717415641 6

Equity Shares issued by a Company
limited by shares to public or its
members [Section 43]Section 43 states that an equity share is a share which is
not a preference share. The main features of equity
shares are:
1.No preferential right as to payment of dividend and
refund of capital.
2.No assurance of dividend.
3.Right to participate in the management of the company
through voting right.
4.Equity shareholders are the last claimants to their
capital contribution in the event of winding up.
5.Such shares cannot be issued at a discount.
Prof. M. C. Sharma M: 9717415641 7

Sweat Equity Share
 According to Section 2(88), sweat equity
shares are those equity shares which are
issued by a company to its directors or
employees at a discount or for a
consideration other that cash, for providing
their know-how or making available rights in
the nature of intellectual property rights or
value addition by whatever name called.
Prof. M. C. Sharma M: 9717415641 8

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Share Capital
Meaning and Forms
 Authorised Share Capital
 Issued Capital
 Subscribed Capital
 Called-up Capital
 Paid-up Capital
= Called-up Capital – Calls in arrears
 Reserve Capital or Reserve Liability of Limited
Company (Omitted in the Companies Act, 2013)

Minimum Subscription
 A company cannot allot any security to the
public unless the ‘minimum subscription’
stated in the prospectus, has been
subscribed or raised.
 The minimum subscription is the amount
which in the opinion of the board of directors,
must be raised by the issue of shares so that
the company has necessary funds to carry
out its objects.
Prof. M. C. Sharma M: 9717415641 10

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Terms of Issue of Shares
 Face Value or Nominal Value:
Nominal value of shares mentioned in the
Memorandum of Association of the Company.
 Issue Price : The price at which shares are issued
by the company.
 Issue at Par
Issue Price = Face Value
 Issue at Premium
Issue Price > Face Value
 Issue at Discount (only for Sweat Equity Shares)
Issue Price < Face Value

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Subscription of Public Issue of
Shares
 Full Subscription
No. of Shares Applied = No. of Shares
issued/offered
 Under Subscription
No. of Shares Applied < No. of Shares
issued/offered
 Over Subscription
No. of Shares Applied > No. of Shares
issued/offered

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Issue of Shares for Cash at Par –
a case of full subscription
1. For receiving application money
Bank A/c Dr.
To Eq./Pref. Share Application A/c
(Being application money received on... Shares @ Rs.
per share)
2. On allotment for transferring application money
to share capital account
Eq./Pref. Share Application A/c Dr.
To Eq./Pref. Share Capital A/c
(Being application money transferred to shareProf. M. C. Sharma M: 9717415641

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3. On allotment-for making due allotment money
Eq./Pref. Share Allotment A/c Dr.
(Being allotment money made due on ... share @
Rs. ..per share)
4. For receiving allotment money
Bank A/c Dr.
To Eq./Pref. Share Allotment A/c
(Being allotment money received)

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5. For making due call money
Eq./Pref. Share .......... Call A/c Dr.
(Being call money made due on... Share @ Rs... per
share)
6. For receiving call money
Bank A/c Dr.
To Eq./Pref. Share .......... Call A/c
(Being call money received)

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Notes:
 If type of share is specified, equity share or
preference share - then various accounts
should be named accordingly, like Equity
Share Capital A/c, Equity Share Application
A/c, Equity Share Allotment A/c and so on.
 When there is only one call, it should be
named as ‘Final Call.’ When there are two or
more calls, these should be named as ‘First
Call’, ‘Second Call’ and so on. The last call is
named as ‘Final Call’. When first call is final
call, then it may be named as ‘Share First &
Final Call A/c’.

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Issue of Shares at
Premium
 (i) When premium has been called on application
the application money will consist of capital and
premium. The amount received as premium should
be credited to ‘Security Premium Account.’ On
allotment application money will be transferred
accordingly:
Share Application A/c Dr.
To Share Capital A/c
To Securities Premium A/c
(Being application money transferred to share capital
and security premium A/c)

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Issue of Shares at
Premium
(ii) If the premium is called along with
allotment money,
then entry for making due allotment money will
be:
Share Allotment A/c Dr.
(Being allotment money, including premium
made due)

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Issue of Shares at
Premium(iii) If the premium is demanded along with call money,
the entry for making due call money will be:
Share Call A/c Dr.
(Being call money including premium made due)
Note:
Normally, it is mentioned in the question as to when
premium is receivable - on application or on
allotment or on calls. In the absence of any
information, it is assumed that the premium is due
along with allotment money.

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Issue of Shares at
Discount*
* Only for issue of Sweat Equity Shares
The amount of discount is recorded at the time of
allotment, therefore the following entries should be
passed for making allotment money due:
Share Allotment A/c Dr.
Discount on Issue of Shares A/c Dr.
(Being amount made due on allotment and adjusted
discount)

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When issue is under-
subscribed
 If the issue is under-subscribed, it may be
assumed that minimum subscription has
been received and the shares are allotted to
all the applicants in full.
 Entries will be passed for actual number of
shares applied and allotted.

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When issue is over-
subscribed
(1) First alternative-Rejecting excess
applications. Under this alternative, excess
applications are out rightly rejected and their
application money is refunded. Following
entry is passed to refund the excess
application money:
To Bank A/c
(Being excess application returned on
rejected applications)

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When issue is over-
subscribed
(2) Second alternative-Proportionate allotment.
When issue is over subscribed, applicants may be
allotted shares in a fixed proportion. This is called
proportionate or pro-rata allotment. The proportion
depends upon the shares offered and share applied. In
this case surplus application money is adjusted towards
sum due on allotment. Following entry is passed for the
same :
To Share Allotment A/c
(Being surplus application money transferred to
share allotment account)

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When issue is over-
subscribed
 Sometimes the surplus application money exceeds
even the money due on allotment.
Such amount has to be returned. However it can be retained by
the company for utilisation towards the future calls, if the articles
of association so authorise.
To Calls-in-Advance A/c
To Bank A/c (Refund)
(Being excess application money transferred to share allotment
and calls-in-advance account and balance refunded)

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When issue is over-
subscribed Third alternative - A combination of the
above two alternatives. The directors may
adopt a combination of the above two
alternatives.
 Some applications may be accepted in full.
 Some applications are rejected, and
 Proportionate allotment is made to the remaining
applicants.

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Calculation of Arrears in
case of Pro-rata allotment
 Allotment Money Due on Prorata Allottee XXX
Less: Surplus Application Money
 (No. of Shares Applied - No. of Shares Allotted)
X Application Money per Share (xx)
Arrears on Allotment XXX
 Allotment Money Received
= Total Allotment Money Due – Surplus Application
Money – Arrears on Allotment

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 Right Issue of Shares
 The concept of rights shares is related to the
further issue of shares to the existing
shareholders in the proportion of their holding.
Accounting treatment is the same as for the public
issue.
 Issue of Two Types of Shares
 A company may issue two types of shares at a
time. These are equity shares and preference
shares. When two types of shares are issued
simultaneously, separate accounts are opened for
each type of shares for capital, application money,
allotment money and call money.

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 Preparing A Cash Book
 Cash Book with bank column may be prepared, if
you are asked to prepare the same.
 In that case all bank transactions shall be
recorded in Cash Book.
 Journal entries will be passed only for non-
banking transactions.

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 Maintaining a Combined Account of
Application and Allotment Money
 A company may maintain only one account for
application and allotment money.
 In such a case, all entries relating to application
and allotment are passed through an account
called ‘Share Application and Allotment A/c.
 In this method only one entry is passed for
making due application and allotment money.
 There is no need to pass an entry for surplus
application money transferred to allotment A/c.

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Calls-in-Arrear
 It is the amount called by the company on allotment
or on calls but not paid by the shareholders.
 Accounting for calls-in-arrear
 (1) First Method. When no separate account is maintained
for calls-in-arrears. When allotment or call money is
received, the entry is passed for actual amount received.
The debit balance on the allotment and/or calls account
represents the calls-in-arrears.
 (2) Second Method. When a separate account is
maintained for ‘Calls-in-Arrears’. The amount not received
on allotment and/or on calls is debited to Calls-in-Arrears
A/c.

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The journal entry will be passed as follows:
Bank Account Dr.
Calls-in-Arrears A/c Dr.
OR To Share ... Call A/c
(Being amount received and calls in arrears brought into
account)
Interest on Calls in Arrears
 When arrears are received, the company charges interest at a
given rate, not exceeding 10% p.a. as per Table F of Schedule I
of Companies Act, 2013
 Entry for receiving interest on calls-in-arrears.
Bank A/c Dr.
To Interest on Calls-in-Arrears A/c
(Being interest received on calls-in-arrear)

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Calls-in-Advance
 Amount paid by the shareholders before the due
date or call becomes due.
 Accounting for Calls-in-Advance
 (a) For receiving calls in advance:
Bank A/c Dr.
To Calls-in-Advance A/c
(Being amount received in advance)
 (b) For adjusting calls in advance:
Calls in Advance A/c Dr.
To Share …. Call A/c
(Being calls-in-advance adjusted with the call money due)

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Interest on Calls in Advance
 The company has to pay interest on the amount
of calls-in-advance from the date of its receipt to
the date of adjustment.
 Rate of interest, if not specified in the Articles, will
not exceed 12% p.a. as per Table F of Schedule I
of Companies Act, 2013.
 Following entry is passed for payment of interest
on calls-in-advance :
Interest on Calls-in-Advance A/c Dr.
To Bank A/c
(Being interest paid on calls-in-advance)Prof. M. C. Sharma M: 9717415641

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Issue of shares for
consideration other than
cash A company can issue shares for purchase of an asset or
for purchase of business or as remuneration to
promoters of the company.
 (a) Entry for purchase of a fixed asset
Fixed Assets A/c Dr.
To Vendor’s A/c
(Being fixed assets purchased from vendor)
Notes: Vendor’s A/c is credited with the amount of
Purchase consideration.

 (b) For purchase of business:
Sundry Assets A/c Dr.
Goodwill A/c (ii) Dr.
To Sundry Liabilities A/c
To Vendor’s A/c (i)
To Capital Reserve A/c (iii)
(Being business purchased)
Prof. M. C. Sharma M: 9717415641 35

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 Notes:
 Vendor’s A/c is credited by purchase consideration.
 Purchase consideration, if not given in the question, it will be
equal to net assets, i.e., Assets minus Liabilities.
 If purchase consideration is given and it is more than net assets,
then the difference shall be debited to Goodwill A/c.
 If purchase consideration is given and it is less than net assets,
then the difference shall be credited to Capital Reserve A/c.

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 For issue of shares to vendors
 (a) Issue of shares at par:
Vendor’s A/c Dr.
(Being shares issued to vendor at par)
 (b) Issue of shares at premium -
Vendor’s A/c Dr.
To Security Premium A/c
(Being shares issued to Vendor at premium)
 (c) Issue of shares at discount -
Cannot be issued as per The Companies Act, 2013.

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 Note : A working note should be prepared to
calculate number of shares to be issued.
 Number of shares to be issued
 For issue of shares to promoters, as a
remuneration of their services:
Goodwill A/c Dr.
(Being shares issued to promoters)
PriceIssue
PayableAmount
=

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Forfeiture of Shares
 Forfeiture of Shares issued
originally issued at par
Share Capital A/c (Amt. called on forfeited shares) Dr.
To Share Allotment A/c (Arrears on Allotment)
To Share ….. Call A/c (Arrears on calls)
To Share Forfeited A/c (Amount received)
(Being ….. shares forfeited due to non-payment of
allotment and call money)

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 Forfeiture of Shares originally
issued at premium
Share Capital A/c Dr. (Amt. called up,
less premium)
Security Premium A/c Dr. (Premium
called but not received)
To Share Allotment A/c (Arrears on allotment)
To Share Call A/c (Arrears on call)
To Share Forfeiture A/c (Amt. received, excluding
premium)
(Being ... shares forfeited due to non-payment of
allotment and call money)

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 Forfeiture of Shares originally issued at
discount
 This topic is irrelevant now.
 Section 53 of The Companies Act, 2013 prohibits issue of equity
shares at a discount.

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Reissue of Forfeited
Shares(a) Reissue at par :
Bank A/c Dr.
(Being forfeited shares reissued at par)
(b) Reissue at premium:
Bank A/c Dr.
To Security Premium A/c
(Being forfeited shares reissued at premium)

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(c) Reissue at Discount :
Bank A/c Dr.
Share Forfeited A/c Dr. (Discount on reissue)
(Being forfeited shares reissued at discount)
Re-issue (of shares originally issued at discount) at a discount
 This topic is irrelevant now.
 Section 53 of The Companies Act, 2013 prohibits issue
of equity shares at a discount.

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Profit on Reissue of Shares
or Capital Reserve
Share Forfeited A/c Dr.
To Capital Reserve A/c
(Being profit on reissued shares transferred to
Capital Reserve A/c)
(1) Capital Reserve = Amount forfeited on re-issued
shares - Discount on re-issue
(2) Capital Reserve, When shares originally issued
at discount are re-issued at discount:
Capital Reserve = Amount forfeited on
reissued shares – Excess Discount on re-issue

Accounting for share capital

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