Accounting for Share Capital
LEARNING OBJECTIVES
a) Understand the meaning of a company
b) understand different classification of share capital
Meaning of a Company:
“ACompany is an artificial person created by law, having separate
entity with a perpetual succession and a common seal.”
Characteristics or Features of a Company
(i) Artificial person
(ii) Voluntary association
(iii) Created by law
(iv) Capital divisible into transferable shares
(v) Limited liability
(vi) Perpetual succession
(vii) Common seal
(viii) Separate legal entity from its members
(ix) May sue or be sued.
Types of Companies
1. Private Company – Section 2 (68) of the Companies Act,
2013 defines “A private Company means a company which
has a minimum paid up share capital as may be
prescribed and which by its Articles of Association –
(a) restricts the right to transfer its shares;
(b) limits the number of its members to 200 excluding its
part or present employee members;
(c) Prohibits any invitation to public to subscribe for any of
its securities.
2. Public Company – A public is a company which:
a) Which is not a private company .
b) Has a minimum paid up capital as prescribed
c) Is a private company, being a subsidiary of a
company which is not a private company.
3. One Person Company – Section 2 (62) of the Companies
Act, 2013 states one person company is a company which
has only one person as a member.
Rule 3 of the Companies (In Corporation) Rules, 2014
provides that.
(i) only on Indian citizen resident in India can form one-
person company.
(ii) Its paid-up capital is not more than 50 lakhs; Its
Average annual turnover should not exceed Rs. 2
crores. It cannot carry out non-banking financial
Investmenactivities.
Classification of Share Capital for Accounting
purpose
Capital: means amount invested in the business for the
purpose of earning revenue. In the case of company
money is contributed by the public and people who
contributed money are called shareholders.
Share Capital: Capital raised by issue of shares is called
share capital.
Authorized Capital: It is the amount stated in the Memorandum of
Association and such amount is the maximum amount that a company
can raise as share capital. (NOMINAL /REGISTERED CAPITAL)
Issued Capital: This is part of authorized capital which is
offered to public for subscription. It cannot exceed
authorized capital.
Subscribed Capital: It is a part of the capital which is for the time being
subscribed to by the members of a company.
This can further be divided into:
Subscribed and fully paid-up:
It is a situation where the company has called up the total nominal
value of the share and has received the same.
Subscribed and not fully paid-up:
It is a situation where the company has called up the total nominal
value of the share but has not received it or has not called-up the total
nominal value of the share.
Called-up Capital:
According to section 2(15) of the Companies Act, 2013, Called-up
Capital means such part of the capital which has been called for
payment.
Paid-up Capital:
According to section 2(64) of the Companies Act, 2013, Paid-up Share
Capital or Share Capital Paid-up means the amount that the
shareholder has paid and the company has received against the amount
Called-up in respect of the shares towards share capital or has been
credited to it as paid-up.
Reserve Capital
It is that portion of uncalled share capital which shall not
be capable of being called up except in the event and for
the purpose of the company being wound up.
Capital Reserve
‘Capital reserve’ is the reserve which is not free for
distribution as dividend. It is mandatory to create capital
reserve in case of capital profits earned by the company.
Reserves which are created out of capital profits are not
readily available for distribution as dividend among the
shareholders,
e.g. premium on issue of shares of debentures, profits on
re-issue of shares, profits prior to incorporation, premium
on redemption of debentures.
Calls in -arrears
Calls -in arrears means the amount not received by the
company ( not paid by shareholders against the amount
called towards share capital)
Calls in advance.
It means calls not due but paid by the shareholder in advance. Thus,
the amount of future calls is received in advance by the company.
Minimum Subscription
It is the amount stated in the prospectus as the minimum
amount that must be subscribed.
Unless the sum payable on application for the sum so
stated (minimum subscription) has been paid to and
received by the company, security cannot be allotted
Disclosure of Share Capital in a Company’s Balance Sheet: Share
Capital is shown in the Company’s Balance Sheet as follows:
Process of Issue and Allotment of Shares
A Public Company can issue shares only after meeting the prescribed legal
compliances. Process of issuing and allotting the shares is explained as below with
the help of a diagram:
Issue of Shares for Cash
If the issue price is received in Lump Sum: In this type of issue, total issue price of
shares is payable in one instalment.
a. To receive Shares Application Money:
Bank A/c …Dr. [amount received]
To Shares Application A/c
(Being application money received)
b. To Allot Shares:
Shares Application A/c …Dr.
To Share Capital A/c [nominal value]
To Securities Premium Reserve A/c [premium amount, when issued at
premium](Being shares allotted and application money transferred to Share
Capital Account and Securities Premium Reserve Account)
If issue price received in Instalments:
In this type of issue, the total issue price of shares is payable in instalments.
I. For receipt of Application money:
Bank A/c ...Dr. [amount received with application]
To Shares Application A/c
II. For Allotment of Shares:
Shares Application A/c …Dr. [application money on shares allotted]
To Share Capital A/c
III. For Amount due on Allotment:
Shares Allotment A/c …Dr. [Money due on shares allotted]
To Share Capital A/c
IV. For receipt of Allotment money:
Bank A/c …Dr. [amount received on shares allotted]
To Shares Allotment A/c.
V. For first call being due:
Shares First Call A/c …Dr. [amount payable on first call]
To Share Capital A/c
VI. For receipt of first call:
Bank A/c …Dr. [amount received on first call]
To Shares First Call A/c
ISSUE OF SHARE FOR CASH AT PAR
Points to remember when shares are issued to public for subscription: The
important points to follow as mentioned below:
I. Calls are made as provided in the Articles of Association of the
company.
II. If the company does not have its own Articles of Association or
Articles of Association does not have a clause to this effect, Table
F of the Companies Act, 2013 will apply.
Table F has the following provisions:
i. A period of one month must elapse between two calls.
ii. The amount of one call should not be less than 25% of the face
value of the share.
iii. Notice of the 14-day period should be given to the shareholders
to pay the amount.
iv. Calls should be made on a uniform basis on all shares within the
same class
Terms of Issue of Shares:
A company may issue shares at par or at premium as explained
below:
I. Shares are issued at Par: It means that the issue price is
same as the nominal value (face value) of the shares.
II. Shares are issued at Premium:
It means that the issue price is more than the nominal value
(face value) of the shares.
Amount more than the nominal value of the share is termed as
premium and such amount of premium is credited to Securities
Premium Account or Securities Premium Reserve Account.
Accounting entries for issue of Shares at Premium:
i. For receipt of Application money:
Bank A/c ...Dr. [amount received on application including
premium]
To Shares Application A/c
ii. For Allotment of Shares:
Shares Application A/c …Dr. [application money on shares
allotted]
To Share Capital A/c [amount paid towards share capital]
To Securities Premium Reserve A/c [amount of premium
received with application money]
iii. For Amount due on Allotment:
Shares Allotment A/c …Dr. [amount due on shares allotted]
To Share Capital A/c [amount paid towards share capital]
To Securities Premium Reserve A/c [amount due
towards premium]
iv. For receipt of Allotment money:
Bank A/c …Dr. [amount received on shares allotted]
Calls-in-Arrears A/c ...Dr. [amount not received against
allotment money]
To Shares Allotment A/c
v. For first call being due:
Shares First Call A/c …Dr. [amount payable on first call]
To Share Capital A/c [amount paid towards share capital]
To Securities Premium Reserve A/c [amount due
to towards premium]
vi. For receipt of first call:
Bank A/c …Dr. [amount received on first call]
Calls-in-Arrears A/c …Dr. [amount not received towards
first call money due]
To Shares First Call A/c
Over subscription
When a company receives applications for shares more than the
number of shares it has offered to the public, it is known as over-
subscription of shares.
In this case, it is not possible for the company to allot shares to every
applicant in the number that he desires. Thus, the company needs to
allot the shares in a proper manner. The company has the following
three alternatives:
1. Reject excess application money
2. Partial or pro rata Allotment
3. Combination of the above two Alternatives
UNDER SUBSCRIPTION OF SHARES
Undersubscription: It is a situation when the
number of shares applied are less than the number
of shares issued for subscription.
Minimum Subscription: As per SEBI Guidelines,
minimum subscription is to receive subscription for
at least 90% of the shares issued.
If the company does not receive minimum
subscription, it cannot allot the shares and
therefore, it will have to refund the application
money to the subscribers.
Calls-in-Arrears and Calls-in-Advance
Calls-in-Arrears:
If the shareholder does not pay the call amount due on allotment or on
any subsequent calls according to the terms, the amount not received is
called Calls-in-Arrears.
ii. Interest on Calls-in-Arrears
interest at the rate of 10% p.a. However, directors have the right to
waive such interest.
Call Money Due:
Share First Call A/c …Dr.
To Share Capital A/c
Call Money Received:
Bank A/c …Dr.
Calls-in-Arrears A/c … Dr.
To Share First Call A/c
Meaning and Accounting Treatment of Calls-in-
Advance:An amount which is accepted by the company
against the call or calls not yet made is termed as Calls-in-
Advance.
ii. Interest in Calls-in-Advance: interest at the rate of 12% p.a.
Accounting Treatment of Calls-in-Advance:
i. To record calls-in-advances:
Bank A/c …Dr. [amount of calls money received in advance]
To Calls-in-Advance A/c
ii. To adjust when the respective call is made due:
Calls-in-Advance A/c …Dr.
To Respective Call A/c
Forfeiture of Shares and Reissue of Forfeited Shares
It means cancellation of shares for non-payment of calls due.
ii. It can be done by the company only if it is allowed by its Articles of
Association
iii. If any of the shareholders of the company does not pay the amount
of call, the company may exercise this power to forfeit the shares held
by the shareholder on which amount of call is not paid.
iv. In case of such forfeiture, the company must first give a clear 14days’
notice to the defaulting shareholder to pay the amount due on call and
interest thereon if any.
v. If the shareholder does not pay, the company may forfeit the shares
by passing an appropriate resolution.
Accounting Entries for forfeiture of Shares:
i. Forfeiture of Shares issued at Par:
Share Capital A/c Dr. (Shares forfeited x Called up value per share)
To Forfeited Shares A/c (Amount received on forfeited shares)
To Share Allotment A/c (Amount due but not paid on allotment)
To Shares Call A/c (Amount due but not paid on call)
ii. Forfeiture of Shares issued at Premium:
a. Securities Premium Amount has been received:
Share Capital A/c Dr. (Called up value less Premium)
To Share Allotment A/c (Amount not received on allotment)
To Shares Call A/c (Amount not received on calls)
To Forfeited Shares A/c (Amount received less premium)
b. Securities Premium Amount has not been received:
Share Capital A/c Dr. (Called up value less premium)
Securities Premium Reserve A/c Dr. (Premium amount called-up but not
received)
To Share Allotment A/c (Amount not received on allotment)
To Shares Call A/c (Amount not received on calls)
To Forfeited Shares A/c (Amount received less premium)
Accounting treatment of Balance in Forfeited Shares Account
When a company has to reissue the forfeited shares there are 2 options for
which different accounting entries are required to be passed as follows:
a. All forfeited shares are reissued:
Forfeited Shares A/c …Dr.
To Capital Reserve A/c
(Being the gain on reissue transferred to Capital Reserve)
b. All forfeited shares are not reissued:
In this case, the amount of discount allowed on reissue of forfeited shares is a
Capital gain (Profit) and therefore, transferred to Capital Reserve. The amount
of forfeited shares not reissued will remain in the Forfeited Shares Account till
the time these shares are reissued.
Gain on reissue is calculated as follows:
Preferential Allotment:
i)It is the allotment of shares at a predetermined price to the
pre-identified people who are interested in taking a strategic
stake in the company.
ii. Requires special resolution for the same has been passed in
the shareholder’s meeting.
iii. Such interested people include promoters, venture
capitalists, financial institutions, people who buy company’s
products or any other party related.
Concept of Private Placement of Shares as per Section 42 of the
Companies Act, 2013:
i. Private Placement means any offer of the securities
or invitation to subscribe securities to a select group
of persons by a company (other than by way of public
offer) through issue of private placement offer letter
and which satisfies the conditions specified in this
section.
ii. securities offered to the selective group of persons by
issuing private placement offer is known as the
Private Placement of Shares. There are conditions
specified by Companies Act, 2013 that are to be
fulfilled for offering such private placement of shares.
Concept of Employees Stock Option Plan (ESOP):
i. It is a category of Sweat Equity which is a wider
term than ESOP and includes issue of shares to
promoters as remuneration for their
contribution towards incorporating the company
and other related services.
ii. It is an option granted to the employees and
employee directors of a Company to subscribe
the company’s shares at a price that is lower
than the market price (fair value) of the share.
iii. It is an option and not an obligation for the
employees and employee directors. Therefore,
they may or may not exercise the option.
iv. It is necessary to fulfil the prescribed conditions
to issue such stock options.
