Accountingforsharecapital 160107074250
Accountingforsharecapital 160107074250
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LEARNING OBJECTIVES
After studying this chapter you should be able
to:
Understand different kinds of companies.
capital.
Record the issuance of shares at par, at
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Meaning and Definition of A Company
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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
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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.
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Types of Shares
Preference Shares
Equity Shares:
a. Equity shares issued by a Company limited by
shares to public or its members [Section 43]
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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
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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.
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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 as a
consideration for providing their know-how or
making available rights in the nature of
intellectual property rights or value addition
by whatever name called.
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Sweat Equity Share
Employee means –
(a) a permanent employee of the company who has been working in
India or outside India, for at least the last one year; or
(b) a director of the company, whether a whole time director or
not; or
(c) an employee or a director as defined in sub-clauses (a) or (b)
above of a subsidiary, in India or outside India, or of a holding
company of the company.
Value additions means actual or anticipated economic benefits
derived or to be derived by the company from an expert and/or a
professional for providing know-how or making available rights in
the nature of intellectual property rights, by such person to whom
sweat equity is being issued for which the consideration is not paid
or included in-
(a) the normal remuneration payable under the contract of
employment, in the case of an employee; and/or
(b) monetary consideration payable under any other contract, in the
case of non-employee. 10
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)
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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.
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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/sold 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
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3. On allotment-for making due allotment money
Eq./Pref. Share Allotment A/c
Dr.
To Eq./Pref. Share Capital A/c
(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.
To Eq./Pref. Share Capital A/c
(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.
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*
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When issue is under-subscribed
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When issue is over-subscribed
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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.
Share Application A/c Dr.
To Share Allotment A/c
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)
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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.
To Share Allotment A/c
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)
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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.
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(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)
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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:
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Note : A working note should be prepared to
calculate number of shares to be issued.
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Forfeiture of Shares
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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.
To Share Capital A/c
(Being forfeited shares reissued at par)
(b) Reissue at premium:
Bank A/c Dr.
To Share Capital A/c
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)
To Share Capital A/c
(Being forfeited shares reissued at 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)
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GLOSSARY
Par Value
Premium Value
Discount Value
Forfeiture
Calls in Arrear
Calls in Advance
Over Subscription & Under Subscription
Goodwill & Capital Reserve
Prof. M. C. Sharma M: 9717415641 47