Accountancy Chapter 2.1 – Accounting for Share Capital

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Chapter 2.1 – Accounting for Share Capital

Accountancy Chapter 2.1 – Accounting for Share Capital

1. Introduction to Joint Stock Companies

  • Definition: A joint stock company is a business entity where the capital is divided into shares owned by shareholders. It is a separate legal entity distinct from its members.
  • Key Features:
    • Artificial Person: Created by law, it has a legal identity separate from its shareholders.
    • Separate Legal Entity: Can own property, enter into contracts, and sue or be sued in its own name.
    • Limited Liability: Shareholders’ liability is limited to the unpaid amount on their shares.
    • Perpetual Succession: The company continues to exist regardless of changes in ownership or membership.
    • Common Seal: Acts as the official signature of the company.
    • Transferability of Shares: Shares of a public company are freely transferable, subject to the company’s Articles of Association.
    • May Sue or Be Sued: The company can enforce contractual rights and be held liable for breaches of contract.

2. Types of Companies

  • Classification Based on Liability:
    • Companies Limited by Shares:
      • Liability of members is limited to the nominal value of shares held.
      • Example: If a shareholder holds 100 shares of ₹10 each, their liability is limited to ₹1,000.
    • Companies Limited by Guarantee:
      • Members’ liability is limited to the amount they guarantee to contribute in the event of winding up.
    • Unlimited Companies:
      • No limit on the liability of members. Their personal assets can be used to settle company debts.
  • Classification Based on Number of Members:
    • Public Company:
      • Not a private company.
      • Shares are freely transferable.
      • Minimum 7 members, no maximum limit.
    • Private Company:
      • Restricts the right to transfer shares.
      • Minimum 2 members, maximum 200.
    • One Person Company (OPC):
      • Only one member.
      • Cannot carry out non-banking financial activities.
      • Paid-up capital not exceeding ₹50 lakhs.

3. Share Capital of a Company

  • Definition: Share capital refers to the funds raised by a company by issuing shares to shareholders.
  • Categories of Share Capital:
    • Authorised Capital:
      • Maximum amount of capital a company is authorized to issue, as stated in the Memorandum of Association.
    • Issued Capital:
      • Part of authorized capital offered to the public for subscription.
    • Subscribed Capital:
      • Part of issued capital actually subscribed by the public.
    • Called-up Capital:
      • Part of subscribed capital called by the company for payment.
    • Paid-up Capital:
      • Part of called-up capital actually paid by shareholders.
    • Uncalled Capital:
      • Part of subscribed capital not yet called by the company.
    • Reserve Capital:
      • Part of uncalled capital reserved to be called only in the event of winding up.

4. Types of Shares

  • Preference Shares:
    • Carry preferential rights over equity shares.
    • Types:
      • Cumulative Preference Shares: Unpaid dividends accumulate and are paid in subsequent years.
      • Non-Cumulative Preference Shares: Unpaid dividends do not accumulate.
      • Redeemable Preference Shares: Can be redeemed after a specified period.
      • Irredeemable Preference Shares: Cannot be redeemed during the company’s lifetime.
  • Equity Shares:
    • Do not carry preferential rights.
    • Dividend varies based on profits available for distribution.
    • May have differential rights as to voting, dividend, etc.

5. Issue of Shares

  • Steps in Share Issue:
    • Issue of Prospectus:
      • A document inviting the public to subscribe to shares.
      • Contains details about the company, its financials, and the terms of the issue.
    • Receipt of Applications:
      • Applications are received along with application money.
      • Minimum subscription must be received within 120 days.
    • Allotment of Shares:
      • Shares are allotted to applicants, and allotment money is collected.
      • Letters of allotment are issued to successful applicants.
    • Calls on Shares:
      • Remaining amount is collected through calls (first call, second call, etc.).
  • Minimum Subscription:
    • The minimum amount that must be raised to meet the company’s needs.
    • Cannot be less than 90% of the issued amount.

6. Accounting Treatment of Share Issue

  • On Application:
    • Money received is credited to Share Application Account.
    • Journal Entry:
Bank A/c Dr.
To Share Application A/c
  • On Allotment:
    • Application money is transferred to Share Capital Account.
    • Allotment money is collected and credited to Share Capital Account.
    • Journal Entry:
Share Application A/c Dr.
To Share Capital A/c
  • On Calls:
    • Call money is collected and credited to Share Capital Account.
    • Journal Entry:
Share Call A/c Dr.
To Share Capital A/c

7. Calls in Arrears and Calls in Advance

  • Calls in Arrears:
    • Amount not paid by shareholders on calls.
    • Journal Entry:
Calls in Arrears A/c Dr.
To Share Call A/c
  • Calls in Advance:
    • Amount paid by shareholders in advance of calls.
    • Journal Entry:
Bank A/c Dr.
To Calls in Advance A/c

8. Over Subscription and Under Subscription

  • Over Subscription:
    • Applications received exceed the number of shares offered.
    • Alternatives:
      • Reject excess applications.
      • Make pro-rata allotment.
      • Combine rejection and pro-rata allotment.
  • Under Subscription:
    • Applications received are less than the number of shares offered.
    • The company must ensure minimum subscription is received.

9. Issue of Shares at Premium and Discount

  • At Premium:
    • Shares issued at an amount more than the nominal value.
    • Premium is credited to Securities Premium Reserve Account.
    • Journal Entry:
Bank A/c Dr.
To Share Capital A/c
To Securities Premium Reserve A/c
  • At Discount:
    • Shares issued at an amount less than the nominal value.
    • Discount is debited to Discount on Issue of Shares Account.
    • Journal Entry:
Bank A/c Dr.
Discount on Issue of Shares A/c Dr.
To Share Capital A/c

10. Forfeiture of Shares

  • Definition: Cancellation of shares due to non-payment of calls.
  • Accounting Treatment:
    • Share Capital Account is debited with the called-up amount.
    • Share Forfeiture Account is credited with the amount received.
    • Journal Entry:
Share Capital A/c Dr.
To Share Forfeiture A/c
To Calls in Arrears A/c

11. Reissue of Forfeited Shares

  • Reissue at Par, Premium, or Discount:
    • Shares can be reissued at par, premium, or discount.
    • Discount on reissue cannot exceed the amount received on forfeited shares.
  • Transfer to Capital Reserve:
    • Profit on reissue is transferred to Capital Reserve.
    • Journal Entry:
Share Forfeiture A/c Dr.
To Capital Reserve A/c

12. Buy-back of Shares

  • Definition: Company purchasing its own shares.
  • Procedures:
    • Must be authorized by Articles of Association.
    • Special resolution must be passed.
    • Amount of buy-back cannot exceed 25% of paid-up capital and free reserves.

13. Private Placement and ESOP

  • Private Placement: Offer of securities to a select group of persons.
  • Employee Stock Option Plan (ESOP): Option granted to employees to subscribe to shares at a future date at a predetermined price.

14. Balance Sheet Presentation

  • Share Capital: Authorized, Issued, Subscribed, and Paid-up Capital.
  • Reserves and Surplus: Securities Premium Reserve, Capital Reserve.
  • Current Liabilities: Calls in Advance, Calls in Arrears.

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