Key Points - Accounting for Share Capital

Company­: It is

1. A Form of business organization

2. It is an Association of persons who provide capital

3. Is an artificial, invisible and intangible

4. Has separate legal identity

5. Has Perpetual existence

6. Has Common seal

7. is not affected by death , insolvency or insanity of individual

Private company­:
According to section 3(1)(iii)

1. Has paid up capital of one lakh

2. Maximum number of members is 50

3. It restricts the right to transfer of shares

4. Prohibits any invitation to public to subscribe for shares and Debentures

5. Prohibits any invitation or acceptance of deposits from persons other than its members , directors or their relatives

PUBLIC COMPANY­:
According to section 3(1)(iv)

1. Is not a private company

2. Has minimum paid up capital of 5 lakhs or higher as may be prescribed

3. Is a private company which is subsidiary of a company which is not a private company

GOVERNMENTCOMPANY
As per section 617 is a company in which more than 50% of paid up capital is held by Central or
State Government or both
FOREIGN COMPANY
Section 591of Act states this type of company is incorporated outside India but has established business in India.

Incorporation of company
There are 4 stages

1. Promotion­ conceiving an idea of business

2. Incorporation or registration

3. Capital subscription ­ which means raising capital

4. Commencement of business for which certificate of Commencement of business is to be obtained.

­ Some important definitions(theory questions)
MINIMUM SUBSCRIPTION :It is number of shares on which amount received is sufficient to commence business .
PROSPECTUS :It is an invitation to public for subscription of shares or debentures.
PRELIMINARY EXPENSES : are expenses incurred for incorporating the company are carried in balance sheet unless these are written off.
CAPITAL­ means amount invested in the business for the purpose of earning revenue. In case of company money is contributed by public and people who contribute money are called shareholders.
SHARE CAPITAL: capital raised by issue of shares is called share capital.
AUTHORISED CAPITAL­:Also Called as Nominal or registered capital .It is the maximum amount of capital a company can issue . It is stated in Memorandum of Association.
ISSUED CAPITAL­: this is part of authorized capital which is offered to public for subscription.
It cannot exceed authorized capital .
SUBSCRIBED CAPITAL : It is part of issued capital subscribed or applied by public.
CALLED UP CAPITAL : It is the amount of nominal value of shares that has been called up by the company for payment by the subscriber towards the share.
PAID UP CAPITAL : It is part of called up capital that the members of company or shareholders have paid.

RESERVE CAPITAL : It is that part of uncalled capital which the company reserve to be called only upon winding up of company. For this a special resolution has to be passed
CAPITAL RESERVE : It is capital profit not available for distribution as dividend.
­ It is represented in balance sheet of company as Reserves and Surplus under the heading Shareholders' Funds

CLASSES OF SHARES : There are two classes of shares

1. Preference shares

2. Equity shares

1. Preference shares : are shares which get preferential right in respect of
A) Right of dividend
B) Repayment of capital on winding up
Equity shares : The shares which are not preference shares are called equity shares and do not get preference in above respect.

ISSUE OF SHARES
Shares can be issued in two ways

1. for cash

2. for consideration other than cash

Terms of issue of share : shares can be issued in three ways

1. Issue of shares at Par

2. Issue of shares at Premium

3. Issue of shares at Discount

Shares payable in Instalments

1. First instalment paid along with application is called as application money.

2. Second instalment paid on allotment is called as allotment money.

3. Subsequent instalment paid are called as call money calls can be more than one and called First call, second call or as the case may be

ISSUE OF SHARES FOR CASH AT PAR : This means shares are issued at face value
Journal entries
For application money
Bank Account Dr. (No. of application received
To Share Application A/c received Amount received
On acceptance of
Share Application Account Dr. (No of shares alloted x application
To Share Capital Account amount called on each)
For allotment money due
Share Allotment Account Dr. (No. of shares alloted x
To Share Capital A/c amount called on each share)
On receipt of allotment
Bank Account Dr. (No. of application money
To Share Allotment A/c allotted x Amount received on each share or actual amount received)
For call money due
Share Call A/c Dr. (No. of shares alloted x
To Share Capital Account amount called on each share)
On receipt of calls
Bank Account
Dr. (No. of application money
To Share Call A/c allotted x Amount received on each share
NOTE : For each entry narration is compulsory as given in example below and carries marks columns are compulsory table should be made in proper format ( all columns are compulsory) after each entry in column of particulars line must be drawn.
Example : X Ltd. invited application for 10,000 shares of the value of Rs.10 each. The amount is payable as Rs.2 on application and Rs.5 on allotment and balance on First and Final call. Teh whole of the above issue was applied and cash duly recived. Give Journal entries for the above transaction.
In the Books of X Ltd.
Solution
JOURNAL
Date
Particulars
L.F.
Bank Account
Dr.
To Share Application A/c (Being the application money received on 10,000 shares at Rs.2 per share)
Share Application A/c
Dr.
To Share Capital A/c (Being the transfer of application money on 10,000 shares to share capital account

ISSUES OF SHARES AT PREMIUM : It is issue of share at more than face value.
This premium can be utilised for

1. Issue of bonus shares

2. Write off preliminary expenses, discount, commission on issue of shares

3. Buy back of shares

4. Redemption of debentures o preference shares
JOURNAL ENTRIES ARE
For application money
Bank Account Dr. (No. of application received
To Share Application A/c receivedx Amount received on each share
On acceptance of
Share Application Account Dr. (with total application money) application
To Share Capital Account (share capital received on application)
To Securities Premium A/c (amount of premium received if any)
For allotment money due
Share Allotment Account Dr (No of shares alloted x amount called on each share
To Share capital Account (securities premium due
To Securities Premium
On receipt of money
Bank Account
Dr (No. of application alloted x
Amount received on each
To Share Allotment A/c share i.e. actual amount received
For call money due
Share Call Account
Dr. (No of shares allotted x amount called on share)
To Share Capital Account
To Securities Premium

On receipt of calls money
Bank Account (Actual amount received)
To Share call Account
Example : V Ltd. Issued 20,000 Equity shares of Rs.10 each at a premium of Rs.3 payable as follows
On Application
Rs.4
On Allotment
Rs.5 (including)
On Application
Rs.2
On Application
Rs.2
All shares were duly subscribed and all money duly received. Pass necessary Journal
Date
IN THE BOOKS OF V Ltd. JOURNAL
Particulars
L.F.
Bank Account
Dr.
To Equity Share Application A/c (Being the application money received on 20,000 shares at Rs.4 per share)
Equity Share Application A/c
Dr.
To Share Capital A/c (Being the transfer of application money on 20,000 shares to share capital account)
Share Allotment A/c
Dr.
To Equity Share Capital A/c
To Securities premium Account (Being the amount due on 20,000 shares at Rs.5 including premium of Rs.3 per share
Bank Account
Dr.
To Share Allotment A/c (Being the receipt of Rs.5 on 20,000 shares)
Equity Share First Call A/c
Dr.
To Equity Share Capital A/c (Being the amount due on 20,000 shares at Rs.2 per share)
Bank Account
Dr.
To Equity Share First Call A/c (Being the receipt of Rs.2 on 20,000 shares)
Equity Share second and Final Call A/c
Dr.
To Equity Share Capital A/c (Being the amount due on 20,000 shares at Rs.2 per share)
Bank Account
Dr.
To Equity Share Second and Final Call. A/c (Being the receipt of Rs.2 on 20,000 shares)

ISSUE OF SHARES AT DISCOUNT : When a company issues shares at price less than its face value it is issue of shares at discount.
Section 79 imposes restrictions on issue at discount According to this

1. Shares must be of the class already issued.

2. Ordinary resolution must be passed in the general meeting which should specify maximum discount.

3. Rate of discount should not be more than 10%

4. Sanction from company Law board must be obtained and shares must be issued within two months of permission.

5. At least one year should have passed since commencement of business has begun
NOTE : Unless specified Discount is given on allotment
JOURNAL ENTRIES (ON ALLOTMENT)
Date
Particulars
L.F.
Share Allotment Account
Dr.
Discount on issue of shares Account
Dr.
To Share Capital (Being the net amount due on allotment)
Bank Account
Dr.
To Share Allotment Account (Being the amount received on allotment
Debit
`
Net Amount due
Amount of discount
Credit
`
Face value of share
Net Amount
Net Amount
Example: J. K. India Ltd. issued 10,000 shares of Rs.10 each at a dscount of 10% payable Rs.5 on application, Rs.3 on allotment and Rs.2 on First and Final Call.
Only 9,000 shares were applied for and the allotment was made to all the applicants.
Give necessary y journal entries in the book of the Company.
JOURNAL ENTRIES
Date
Particulars
L.F.
Debit
Credit

Bank Account
Dr.

Calculations ? Net assets = total assets ­ liabilities = Rs.1,800,000­Rs.20,000= Rs.1,60,000
Capital reserve = Net Asset­ purchase consideration = Rs.1,60,000­Rs.1,50,000= Rs.10,000
Sweat equity Shares : [section 79 A] These are the shares which are issued by the companies to its employees or directos at a discount or for consideration other than cash for providing knowhow or intellectual property rights or value addition
These can be issued only after one year of commencement of business and is reward for their hard work.
Private placement of shares : [section 81 (1A) This is an issue of shares of securites to a relatively small selected group of persons not to the public.
This is governed by SEBI guidlines and requires special resolution to be passed in General
Body meeting.
Under subscription : When the number of received is less than the number of shares offered to public it is under subscription
Oversubscription : When the number of received is more than the number of shares offered to public it is oversubscription.