Accounting for Share Capital Class 12 Notes Accountancy - CBSE

Unit : 2


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    What are Accounting for Share Capital ?

    Meaning Of Company

    “A Company is an artificial person created by law, having seperate entity with a perpetual succession and a common seal”.

    Features of a Company

    • Separate Legal Entity
    • Perpetual Existence
    • Limited Liability
    • Common Seal
    • Transferability of Shares
    • Separation of Management

    Features of a Company

    Companies on the basis of liabilities

    • Companies limited by Shares
    • Companies limited by Guarantee
    • Unlimited Companies

    Companies on the basis of members

    • One Person Companies
    • Private Companies
    • Public Companies

    Companies on the basis of control

    • Holding and Subsidiary
    • Associate Companies

    Meaning Of Shares

    In simple words, a share indicates a unit of ownership of the particular company.

    Nature Of Shares

    Shares of a company are treated as goods under the Sale of Goods Act, 1930. These can be bought, sold, hypothecated and bequeathed.

    Kinds Or Types Of Shares

    A Company can issue two types of shares, as per Section 43 of the Companies Act, 2013:

    • Equity Shares
    • Preference Shares

    Equity Shares

    These are also known as ordinary shares, and it comprises the bulk of the shares being issued by a particular company. As an equity shareholder, you are not only ntitled to voting rights on company issues, but also have the right to receive dividends. There is no fixed rate of dividend on the equity shares.

    Preference Shares

    These are among the next types of shares issued by a company. Preferential shareholders receive preference in receiving dividend as compared to ordinary shareholders. Also, in the event of liquidation of a particular company, the preferential shareholders are paid off before ordinary shareholders.

    Types of Preference Shares

    • Cumulative and Non-Cumulative Preference Shares: In the case of cumulative preference shares, if a particular company doesn’t declare an annual dividend, the benefit is carried forward to the next financial year. Non-cumulative preference shares don’t provide for receiving outstanding dividends benefits.
    • Participating and Non-Participating Preference Shares: Participating preference shares allow shareholders to receive surplus profits, after payment of dividends by the company. This is over and above the receipt of dividends. Non-participating preference shares carry no such benefits, apart from the regular receipt of dividends.
    • Convertible and Non-Convertible Preference Shares: Convertible preference shares can be converted into equity shares, after meeting the requisite stipulations by the company’s Article of Association (AoA). Non-convertible preference shares carry no such benefits.
    • Redeemable and Irredeemable Preference Shares: Redeemable preference shares are to be repaid by the company within a stipulated period is accordance with the terms of issue and the fulfilment of certain conditions laid down is Section 53 of the Companies Act, 2013. Irredeemable preference shares, on the other hand, cannot be repaid before winding up of the company.

    Meaning Of Share Capital

    Share Capital means the capital raised by a company by the issue of shares.

    Kinds Or Types Of Share Capital

    • Authorised, Registered or Nominal Share Capital: Every company, in its Memorandum of Association, requires to prescribe the maximum amount of capital that can be raised by the company by issuing shares during its lifetime.
    • Issued Share Capital: This implies the specified portion of the company’s capital, which has been offered to investors through issuance of equity shares.
    • Subscribed Share Capital: The portion of the issued capital, which has been subscribed by the public is known as subscribed share capital.
    • Called-Up Capital: The portion of subscribed capital, which has been called by the directors from shareholders for payment.
    • Reserve Capital: As per Section 65 of the Companies Act, 2013, only an unlimited company having a share capital while converting into a limited company, may have reserve capital.
    • Paid-Up Capital: The amount of money paid by shareholders for holding the company’s stocks is known as paid-up capital. As shareholders pay the entire amount at once, subscribed and paid-up capital refer to the same amount.

    Issue Of Shares

    A company may issue shares at their face value or at a price other than the face value. When shares are issued at a price equal to their face value it is termed as shares issued at par. When issue price of a share is more than its face value, it is known as shares issued at a premium. If issue price of a share is less than its face value, it is called as shares issued at a discount.

    Public Subscription Of Shares

    A company decides to issue number of shares to raise capital. It invites public to buy these shares. Now there may be three situations:

    I. Full Subscription

    • Company may receive applications equal to the number of shares company has offered to people. It is called full subscription. In case of full subscription, the journal entries will be made as follows:

    (a) On receipt of application money
    Bank A/c      Dr.
    To Share Application A/c
    (Being application money received for ......... shares)

    (b) On allotment of shares
    Share Application A/c Dr.
    To Share Capital A/c
    (Being application money of shares transferred to share capital account on their allotment)

    II. Under Subscription

    • The issue is said to have been under subscribed when the company receives applications for less number of shares than offered to the public for subscription.

    In this case company is not to face any problem regarding allotment since every applicant will be alloted all the shares applied for. But the company can proceed with allotment provided the subscription for shares is at least equal to the minimum required number of shares termed as minimum subscription.

    III. Over Subscription

    When company receives applications for more number of shares than the number of shares offered to the public for subscription it is a case of over subscription.
    A company cannot allot more shares than what it has offered. In case of over subscription, company has the
    following options:

    Rejection of Excess Applications and Money returned: The company may reject the applications for
    shares in excess of the shares offered for issue and a letter of rejection is sent to such applicants.
    Share Application A/c         Dr.
    To Bank A/c
    (Being application money on … shares refunded to the applicants)
    Excess application money adjusted towards sum due on allotment:
    Shares Application A/c        Dr.
    To Share Allotment A/c
    (Being excess application money adjusted towards sum due on allotment)
    If the application money received on partially accepted applications is more than the amount required for adjustment towards allotment money, the excess money is refunded. However, if the Articles of the company so authorise, the directors may retain the excess money as calls in advance to be adjusted against the call/ calls falling due later on and the following entry is made:
    Share Application A/c          Dr.
    To Calls-in-Advance A/c
    (Being adjustment of excess share application money retained as call-in-advance in respect of... shares)


    • True Fruit: Developed from ripened ovary.
    • Parthenogenesis: Ovary gets transformed to fruit without fertilization. Ex: Banana.
    • Parthenocarpy: Seedless fruit which is formed due to gibberellins & auxins.
    • False Fruit: Any part of flower other than ovary forms the fruit. Ex: Apple.

    Other Modes of Reproduction

    • Apomixis: Apomixis: Form of asexual reproduction where seed is formed without fertilization. Ex. Citrus and Mango.
    • Polyembryony: Occurrence of more than one embryo in a seed. Ex: Citrus, groundnut.

    Partial Acceptance Of Applications

    In some cases, the company accepts the applications for subscription partially. It means that the company does not allot the full number of shares applied for.
    For example:
    If an applicant has applied for 5000 shares and is allotted only 2000 shares, then the applications is said to have been partially accepted. The company may evolve some formula of accepting applications partially or making proportionate allotment/the Prorata allotment which means that the applicants are allotted shares
    In such a case the company adjusts the excess share money received on application towards share allotment money due on partially accepted applications.
    Share Application A/c Dr.
    To Share Allotment A/c
    (Being share application money transferred to Share Allotment Account in respect of ... shares)

    Private Placement Of Shares

    Private placement by companies means offering its securities or inviting to subscribe its securities for a selected group of persons other than by way of a public issue through a private placement offer letter.

    Employees’ Stock Option Plan (E SOP)

    Employees’ Stock Option means option given to the directors, officers or employees of a company / its holding company / subsidiary company to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.

    Sweat Equity Shares

    The sweat equity shares mean shares issued by a company to its directors or employees for non-cash consideration or at a discount for making rights available in the nature of intellectual property rights or providing know-hows or any value additions in any form.

    Issue Of Shares For Consideration Other Than Cash

    A compnay may issue fully paid shares for consideration other than cash, in the following circumstances:

    I. Issue of Shares to Promoters

    Incorporation costs or formation expenses A/c    Dr.
    To Share Capital A/c
    (Being shares issued to promoters)

    II. Issue of Shares for Purchase of Assets

    Sundry Assets A/c    Dr.
    To Vendors’ A/c
    (Being assets purchased from the vendor)
    Vendors’ A/c              Dr.
    To Share Capital A/c
    (Being shares issued to vendor)

    Forfeiture Of Shares

    When a shareholder fails to pay calls, the company, if empowered by its articles, may forfeit the shares. The entry in this case will be:

    Share Capital A/c Dr. (with the called amount (Nominal) on such shares as capital)
    Securities Premium Reserve A/c Dr. (If shares are issued at premium and it is not received)
    To Discount on Issue of Shares A/c (If shares are issued at discount initially)
    To Calls in Arrears A/c  (amount unpaid on calls or allotment)
    To Share forfeiture A/c (with the amount already received)

    Re-issue of Forfeited Shares

    Bank A/c Dr. (Amount received on such re-issue)
    Shares Forfeiture A/c Dr. (Discount on re-issue of shares)
    To Share Capital A/c (with face value of shares)
    To Securities Premium Reserve A/c (If shares are re-issued at premium)
    When all forfeited sharers shares are not issued, i.e., only a part of such shares is re-issued, then amount of
    surplus in share forfeiture account related to these shares should be transferred to capital reserve account
    instead of whole amount.

    Disclosure Of Share Capital In The Balance Sheet Of A Company

    Balance Sheet is prepared and presented in the form prescribed in Schedule III, Part I of the Companies Act, 2013, and is broadly divided into two parts, (i) Equity and Liabilities (ii) Assets.

    Proforma of Balance Sheet (As per Revised Schedule VI)

    Disclosure of Share Capital in Balance Sheet
    Balance Sheet ............
    as on ............

    Particulars Note no. Current Year Previous Year
    Equity and Liabilities
    Shareholder’s Funds:
    (a) Share Capital
    (b) Reserve & Surplus
    (c) Money Received against Shares Warrants

    As per Schedule III disclosure requirements pertaining to share capital are to be provide in notes to accounts.

    Notes to Account:

    Particulars Amount in ₹ Amount in ₹
    (a) Share Capital
    Authorised Capital

    ............ Equity Shares of ₹ ............ Each
    ............ Preference Shares of ₹ ............ Each
    Issued Capital
    ............ Equity Shares of ₹ ............ Each
    ............ Preference Shares of ₹ ............ Each
    Subscribed Capital
    ............ Equity Shares of ₹ ............ Each
    ............ Preference Shares of ₹ ............ Each
    Called-up Capital
    ............ Shares of ₹ ............ Each, ₹ ............ Per share called-up
    Paid-up Capital
    Called-up Capital
    Less: Calls in arrears:
    1. by Directors
    2. by Others
    Add: Share forfeited: