Company Accounts: Accounting for Share Capital | Class 12 Accountancy

Company, Shares and Kinds of Share Capital

A company is a voluntary association of persons, incorporated under the Companies Act, with a separate legal entity, perpetual succession, a common seal and limited liability for its members. Its capital is divided into units of small denomination called shares; a person holding shares is a shareholder.

Shares are of two kinds:

Preference shares — carry a preferential right to a fixed dividend and to repayment of capital on winding up, before equity shares.
Equity shares — the ordinary shares; they get dividends after preference shares, carry voting rights, and bear the main risk and reward.

The term share capital is used at several levels, which the exam loves to test:

Term	Meaning
Authorised (Nominal) capital	the maximum capital the company is allowed to raise (stated in the Memorandum).
Issued capital	the part of authorised capital actually offered to the public.
Subscribed capital	the part of issued capital actually applied for by the public.
Called-up capital	the part of subscribed capital the company has asked shareholders to pay.
Paid-up capital	the amount actually received against the called-up capital.

So Authorised ≥ Issued ≥ Subscribed ≥ Called-up ≥ Paid-up. Understanding these layers is essential before recording the issue of shares.

1

Worked Example

Example 1: State two features of a company.

Solution

Distinct legal traits.

Separate legal entity and limited liability (also perpetual succession, common seal).

2

Worked Example

Example 2: Which shares get a fixed dividend before others?

Solution

Preference first.

Preference shares carry a preferential right to a fixed dividend.

3

Worked Example

Example 3: The maximum capital a company may raise is its ____ capital.

Solution

The cap.

Authorised (nominal) capital, stated in the Memorandum.

Key Points

- Company: separate legal entity, perpetual succession, limited liability, common seal; capital in shares.
- Preference shares (fixed dividend first) vs equity shares (ordinary, voting, residual).
- Capital layers: Authorised ≥ Issued ≥ Subscribed ≥ Called-up ≥ Paid-up.

✎ Quick Check — 2 questions0 / 2

Q1.The maximum capital a company is allowed to raise is its:

Explanation: Authorised (nominal) capital is the maximum, stated in the Memorandum.

Q2.Shares with a preferential right to a fixed dividend are:

Explanation: Preference shares carry a fixed, prior dividend.

Issue of Shares: Par, Premium, and Calls

A company collects the price of a share in instalments: application, allotment, and one or more calls (first call, second/final call). Each instalment is recorded when the money is due and again when received.

If shares are issued at par (at face value), the entries for, say, a Rs 10 share collected as Rs 3 on application, Rs 4 on allotment and Rs 3 on first & final call are:

On application: Bank A/c Dr / To Share Application A/c.
On allotment due: Share Application A/c Dr (transfer) and Share Allotment A/c Dr / To Share Capital A/c.
On allotment received: Bank A/c Dr / To Share Allotment A/c.
On call: Share Call A/c Dr / To Share Capital A/c; then Bank A/c Dr / To Share Call A/c.

Issue at premium. When a share is issued for more than its face value, the excess is the securities premium. It is credited to the Securities Premium Reserve A/c (a capital reserve), never to Share Capital. For a Rs 10 share issued at Rs 12 (premium Rs 2, usually with allotment): Share Allotment A/c Dr / To Share Capital A/c and To Securities Premium Reserve A/c. The premium can be used only for specified purposes under Section 52 — issuing bonus shares, writing off preliminary expenses, premium on redemption, or buy-back. Note that issuing shares at a discount is generally prohibited (Section 53), except sweat equity. So the two real cases are at par and at premium.

1

Worked Example

Example 1: A Rs 10 share is issued at Rs 13. What is the premium and where is it credited?

Solution

Excess over face value.

Premium = 13 − 10 = 3.
Credited to Securities Premium Reserve A/c.

2

Worked Example

Example 2: What entry records money received on application?

Solution

Bank in.

Bank A/c Dr / To Share Application A/c.

3

Worked Example

Example 3: Can shares normally be issued at a discount?

Solution

Generally no.

Section 53 prohibits issuing shares at a discount (except sweat equity).

Key Points

- Share price is collected in instalments: application → allotment → call(s); each recorded when due and when received.
- Premium (excess over face value) → Securities Premium Reserve A/c (never Share Capital); used only for Section 52 purposes.
- Issue at a discount is prohibited (Sec 53), except sweat equity.

✎ Quick Check — 2 questions0 / 2

Q1.The amount received over the face value of a share is the:

Explanation: The excess over face value is the securities premium.

Q2.Securities premium is credited to the Securities Premium Reserve A/c, not to:

Explanation: Premium is kept separate from Share Capital.

Over-subscription, Calls-in-Arrears, Calls-in-Advance and Forfeiture

A popular issue may be over-subscribed — more shares applied for than offered. The company cannot allot more than it issued, so it deals with the excess by: rejecting some applications (refund money), making a pro-rata allotment (allot proportionately and adjust excess application money towards allotment), or a combination.

Two timing issues on calls:

Calls-in-Arrears — an amount called but not yet paid by a shareholder. It is shown as a deduction from called-up capital; interest may be charged (up to 10% p.a. per Table F).
Calls-in-Advance — an amount paid before it is called. It is a liability of the company; interest may be paid (up to 12% p.a. per Table F).

Forfeiture of shares. If a shareholder fails to pay the calls, the company may forfeit (cancel) his shares after due notice. On forfeiture, the Share Capital account is debited with the called-up amount, the amount already received is transferred to a Forfeited Shares A/c (a capital reserve in the making), and the unpaid calls are cancelled. The forfeited shares can then be re-issued, usually at a discount not exceeding the amount forfeited. On re-issue, the loss (discount allowed) is met from the Forfeited Shares A/c, and any balance left in it is transferred to Capital Reserve.

For example, if Rs 5 had been received on a Rs 10 forfeited share later re-issued at Rs 8 (discount Rs 2), the Rs 2 discount is taken from the Rs 5 forfeited amount, and the remaining Rs 3 goes to Capital Reserve. These adjustments complete the accounting for share capital from issue to re-issue.

1

Worked Example

Example 1: What is meant by over-subscription?

Solution

More applied than offered.

When applications received exceed the number of shares issued.

2

Worked Example

Example 2: Distinguish calls-in-arrears and calls-in-advance.

Solution

Unpaid vs prepaid.

Calls-in-arrears: called but not yet paid (deducted from capital).
Calls-in-advance: paid before being called (a liability).

3

Worked Example

Example 3: Rs 4 was received on a Rs 10 forfeited share, re-issued at Rs 9. How much goes to Capital Reserve?

Solution

Forfeited less re-issue discount.

Discount on re-issue = 10 − 9 = 1.
Capital Reserve = 4 − 1 = 3.

Key Points

- Over-subscription: reject / pro-rata allotment / adjust excess money to allotment.
- Calls-in-arrears (unpaid, deducted from capital, interest up to 10% p.a.); calls-in-advance (prepaid, a liability, interest up to 12% p.a.).
- Forfeiture: cancel shares, keep received amount in Forfeited Shares A/c; on re-issue, cover the discount, transfer the balance to Capital Reserve.

✎ Quick Check — 2 questions0 / 2

Q1.An amount called but not yet paid by a shareholder is:

Explanation: Calls-in-arrears is the unpaid called amount.

Q2.On re-issue of forfeited shares, the balance of the Forfeited Shares A/c is transferred to:

Explanation: Any balance left after meeting the re-issue discount goes to Capital Reserve.