Chapter 1 Accounting for Share Capital

Learning Objectives of Accounting for Share Capital

After studying this chapter, you will be able to:

Explain the basic nature of a joint stock company as a form of business organisation and the various kinds of companies based on liability of their members;
Describe the types of shares issued by a company;
Explain the accounting treatment of shares issued at par, at premium, and at discount including oversubscription;
Outline the accounting for forfeiture of shares and reissue of forfeited shares under varying situations;
Work out the amounts to be transferred to capital reserve when forfeited shares are reissued; and
Prepare share forfeited account.

Features of a Company

A company may be viewed as an association of persons who contribute money or money’s worth to a common inventory and use it for a common purpose. It is an artificial person having a corporate legal entity distinct from its members (shareholders) and has a common seal used for its signature. Thus, it has certain special features which distinguish it from other forms of organisation. These are as follows:

Body Corporate: A company is formed according to the provisions of law enforced from time to time. Generally, in India, the companies are formed and registered under Companies Law except in the case of banking and insurance companies for which a separate law is provided for.
Separate Legal Entity: A company has a separate legal entity which is distinct and separate from its members. It can hold and deal with any type of property. It can enter into contracts and even open a bank account in its own name.
Limited Liability: The liability of the members of the company is limited to the extent of the unpaid amount of the shares held by them. In the case of companies limited by guarantee, the liability of its members is limited to the extent of the guarantee given by them in the event of the company being wound up.
Perpetual Succession: The company, being an artificial person created by law, continues to exist irrespective of the changes in its membership. A company can be terminated only through law. The death, insanity, or insolvency of any member of the company in no way affects the existence of the company. Members may come and go but the company continues.
Common Seal: The company, being an artificial person, cannot sign its name by itself. Therefore, every company is required to have its own seal which acts as the official signature of the company. Any document which does not carry the common seal of the company is not binding on the company.
Transferability of Shares: The shares of a public limited company are freely transferable. The permission of the company or the consent of any member of the company is not necessary for the transfer of shares. However, the Articles of the company can prescribe the manner in which the transfer of shares will be made.
May Sue or be Sued: A company, being a legal person, can enter into contracts and can enforce the contractual rights against others. It can sue and be sued in its name if there is a breach of contract by the company.

Kinds of Companies and Share Capital of a Company

Kinds of Companies

Companies can be classified based on the liability of their members or the number of members.

Based on Liability of Members

Companies Limited by Shares: The liability of members is limited to the nominal value of shares held. If fully paid, members have no further liability for company debts.
Companies Limited by Guarantee: Members' liability is limited to the amount they agree to contribute in the event of winding up.
Unlimited Companies: There is no limit on members' liability. If company property is insufficient to pay debts, members' private property can be used. This type is not common in India.

Based on Number of Members

Public Company: Not a private company and not a subsidiary of a private company.
Private Company: Restricts the right to transfer its shares, must have at least 2 members (except in the case of a one-person company), and limits the number of members to 200 (excluding employees).
One Person Company (OPC): Defined by the Companies Act, 2013 as a company with only one member. Only an Indian citizen and resident can form an OPC. It cannot engage in non-banking financial investment activities, and its paid-up share capital should not exceed Rs. 50 Lakhs, with an average annual turnover not exceeding Rs. 2 Crores.

Share Capital of a Company

A company, being an artificial person, collects its capital from shareholders, known as share capital. Various categories of share capital from an accounting perspective include:

Categories of Share Capital

Authorised Capital: The maximum amount of share capital a company is authorised to issue, as specified in the Memorandum of Association. It can be increased or decreased as per the Companies Act and need not be issued all at once.
Issued Capital: Part of the authorised capital issued for public subscription, including shares allotted to vendors and memorandum signatories. Unissued capital can be offered later.
Subscribed Capital: Part of the issued capital actually subscribed by the public. It may be equal to or less than the issued capital.
Called up Capital: Part of the subscribed capital called up by the company from shareholders. The remaining uncalled portion can be collected when needed.
Paid up Capital: The portion of called-up capital actually received from shareholders. Paid-up capital equals called-up capital minus calls in arrears.
Uncalled Capital: The portion of subscribed capital not yet called up. It can be collected as needed for further funds.

Nature and Classes of Shares

Shares refer to the units into which the total share capital of a company is divided. Thus, a share is a fractional part of the share capital and forms the basis of ownership interest in a company. The persons who contribute money through shares are called shareholders.

The amount of authorized capital, together with the number of shares in which it is divided, is stated in the Memorandum of Association. However, the classes of shares in which the company's capital is to be divided, along with their respective rights and obligations, are prescribed by the Articles of Association of the company. According to The Companies Act, a company can issue two types of shares:

Preference Shares
Equity Shares (also called ordinary shares)

1. Preference Shares

According to Section 43 of The Companies Act, 2013, a preference share is one that fulfills the following conditions:

It carries a preferential right to dividend to be paid either as a fixed amount payable to preference shareholders or an amount calculated by a fixed rate of the nominal value of each share before any dividend is paid to the equity shareholders.
With respect to capital, it carries or will carry, on the winding up of the company, the preferential right to the repayment of capital before anything is paid to equity shareholders.

However, a holder of the preference share may have a right to participate fully or to a limited extent in the surpluses of the company as specified in the Memorandum or Articles of the company. Thus, preference shares can be:

Participating or non-participating
Cumulative or non-cumulative
Redeemable or irredeemable

2. Equity Shares

According to Section 43 of The Companies Act, 2013, an equity share is a share that is not a preference share. In other words, shares that do not enjoy any preferential right in the payment of dividend or repayment of capital are termed as equity/ordinary shares. The equity shareholders are entitled to share the distributable profits of the company after satisfying the dividend rights of the preference shareholders. The dividend on equity shares is not fixed and may vary from year to year depending upon the amount of profits available for distribution. The equity share capital may be:

With voting rights
With differential rights as to voting, dividend or otherwise in accordance with such rules and subject to such conditions as may be prescribed in the Articles of Association of the company

Issue of Shares and Accounting Treatment

Issue of Shares

Shares of a company can be issued at either par or premium. Shares are issued at par when their issue price is equal to their nominal value, and at a premium when issued above the nominal value. The excess amount in the latter case is called a premium.

Minimum Subscription

The minimum amount that must be raised to meet the company’s business operation needs, including the price of purchased property, preliminary expenses, and working capital. It cannot be less than 90% of the issued amount according to SEBI guidelines. If not met, the company must refund the subscription amount received with interest if delayed beyond 8 days from the subscription list closure.

Accounting Treatment

On Application

All money received with the application is deposited in a separate bank account.

Journal Entry:

Bank A/c Dr.
   To Share Application A/c
   (Amount received on application for — shares @ Rs. ___ per share)

On Allotment

When minimum subscription is received and legal formalities are completed, shares are allotted.
Allotment Money is called from the allottees.
Application money received is transferred to the share capital account.

Journal Entries:

Share Application A/c Dr.
   To Share Capital A/c
   (Application money on ___ shares allotted)

Share Allotment A/c Dr.
   To Share Capital A/c
   (Amount due on allotment of ___ shares @ Rs. ___ per share)

Bank A/c Dr.
   To Share Allotment A/c
   (Allotment money received on ___ shares @ Rs. ___ per share)

Learned about Calls in Arrears, Calls in Advance, Over Subscription, Under Subscription, Issue of Shares at a Premium, Issue of Shares at a Discount, and Issue of Shares for Consideration other than Cash

Calls in Arrears

Calls in Arrears occur when shareholders fail to pay the amount due on allotment or calls. The unpaid amounts are cumulatively called 'Unpaid calls' or 'Calls in Arrears'. Companies may charge interest on calls in arrears, and it is not mandatory to maintain a separate Calls-in-Arrears Account.

Calls in Advance

Calls in Advance occur when shareholders pay a part or whole of the amount not yet called up. The amount received in advance is a liability for the company and credited to the Calls in Advance Account. Interest is payable on these amounts as per the provisions of the Articles of Association or as per Table F of the Companies Act.

Over Subscription

Over Subscription happens when applications for more shares are received than offered for subscription. Directors can either accept some applications in full and reject others, make a pro-rata allotment to all applicants, or adopt a combination of both.

Under Subscription

Under Subscription occurs when applications received are less than the number of shares offered to the public. The issue is termed 'under subscribed' if the minimum subscription is not received to the extent of 90%.

Issue of Shares at a Premium

Shares issued at a premium are sold at an amount more than their nominal or par value. The premium amount is credited to a separate account called 'Securities Premium Reserve Account' and its use is strictly regulated by law.

Issue of Shares at a Discount

Shares may be issued at a discount, which means they are sold at less than their nominal value. This is generally subject to stringent regulatory provisions and requires the approval of the company's shareholders.

Issue of Shares for Consideration Other than Cash

Shares can be issued for considerations other than cash when a company purchases a business or assets, and the vendors agree to receive payment in the form of fully paid shares. This type of issuance forms the basis of ownership and capital structure in a company.

Employees Stock Option Plan (ESOP)

A company may offer an option to its employees and employee directors to subscribe to the company's shares at a lower price than its market value or fair value at a future date. This is known as the Employees Stock Option Plan (ESOP). As it is an option granted by the company, an employee may or may not exercise the right to subscribe.

Conditions for Issuing ESOP

The shares are of the same class as those already issued.
The issuance is authorized by a special resolution passed by the company.
The resolution specifies the number of shares, the current market price, any consideration, and the class or classes of directors or employees to whom the shares will be issued.
At least one year has elapsed since the company commenced business at the date of issue.
The shares are issued in accordance with SEBI regulations, if the shares are listed.

Important Terms of ESOP

Grant: Giving an option to employees to subscribe to the company's shares at the pre-determined price.
Grant Date: The date of agreement between the enterprise and its employees to the terms of the ESOP.
Vesting: The process of giving employees the right to apply for shares of the company.
Vesting Date: The date on which the employee becomes entitled to apply for the shares once the vesting conditions are satisfied.
Vesting Period: The period between the grant date and the date on which all specified vesting conditions of the ESOP need to be satisfied.
Exercise: Applying for the issue of shares against the option vested in the employee.
Exercise Period: The period after vesting within which the employee must exercise the right to apply for shares against the option vested in them in pursuance of the ESOP.
Exercise Price: The price payable by the employee for exercising the option granted in pursuance of the ESOP.
Value of Option: The difference between the market price and the issue price of the security.

Applications Supported by Blocked Amount (ASBA)

Initial Public Offers and Rights Issues of securities such as Shares, Debentures, or other financial instruments may be subscribed by paying the application money through various methods, including Applications Supported by Blocked Amount (ASBA). ASBA is a method for payment of application money.

ASBA is a process developed by the Securities and Exchange Board of India (SEBI) to apply for subscribing to IPOs and Rights Issues of securities. Under this method, the applicant authorizes the bank to block the bank account for the application money for subscribing to the issue. The bank debits the applicant’s account with the application money only if the applicant is allotted securities (shares, debentures, etc.) for the amount payable on the allotted securities. In case securities are not allotted, the bank removes the block (lien) on the amount.

Under ASBA-based applications, the application amount payable on the securities applied is blocked by the bank, i.e., it marks a lien on the amount payable as application money on the securities applied. After the company has allotted the securities, the bank debits the applicant’s bank account by the amount payable on the allotted securities and removes the lien on the balance amount.

Questions for Practice

Short Answer Questions

What is a public company?
A public company is a company that has issued securities through an initial public offering (IPO) and is traded on at least one stock exchange.
What is a private company?
A private company is a company held under private ownership with shares that are not traded publicly on the stock exchange.
When can shares be forfeited?
Shares can be forfeited if a shareholder fails to pay the allotment or call money on the shares.
What is meant by Calls in Arrears?
Calls in Arrears refer to the amount that a shareholder has not paid by the due date for the call money requested by the company.
What do you mean by a listed company?
A listed company is a public company whose shares are traded on a recognized stock exchange.
What are the uses of securities premium?
Securities premium can be used for issuing fully paid bonus shares, writing off preliminary expenses, and providing for the premium payable on the redemption of debentures or preference shares.
What is meant by Calls in Advance?
Calls in Advance refer to the amount received in advance from shareholders for the calls not yet made by the company.
Write a brief note on “Minimum Subscription”.
Minimum Subscription is the minimum amount that must be raised by a company through the issue of shares in order to proceed with the allotment of shares.

Long Answer Questions

What is meant by the word ‘Company’? Describe its characteristics.
A company is a legal entity formed by a group of individuals to engage in and operate a business enterprise. It has characteristics such as limited liability, perpetual succession, and a separate legal entity.
Explain in brief the main categories in which the share capital of a company is divided.
The share capital of a company is typically divided into equity share capital and preference share capital.
What do you mean by the term ‘share’? Discuss the type of shares, which can be issued under the Companies Act, 2013 as amended to date.
A share represents a unit of ownership in a company. The Companies Act, 2013 allows for the issuance of equity shares, preference shares, and sweat equity shares.
Discuss the process for the allotment of shares of a company in case of over subscription.
In the case of over subscription, the company may allot shares on a pro-rata basis, reject excess applications, or refund excess money received.
What is a ‘Preference Share’? Describe the different types of preference shares.
Preference shares are shares that carry preferential rights regarding dividend payments and repayment of capital. Types include cumulative, non-cumulative, redeemable, and convertible preference shares.
Describe the provisions of law relating to ‘Calls in Arrears’ and ‘Calls in Advance’.
Calls in Arrears refer to unpaid call money by the due date. Calls in Advance refer to money received in advance for calls yet to be made. The Companies Act regulates the treatment and disclosure of these amounts.
Explain the terms ‘Over subscription’ and ‘Under subscription’. How are they dealt with in accounting records?
Over subscription occurs when applications for shares exceed the number offered. Under subscription occurs when applications are less than the shares offered. Over subscription is managed by pro-rata allotment or refunding excess, while under subscription may require the issue to be canceled.
Describe the purposes for which a company can use the amount of Securities Premium.
The securities premium can be used for issuing fully paid bonus shares, writing off preliminary expenses, underwriting commission, and redemption of preference shares and debentures.
State clearly the conditions under which a company can issue shares at a discount.
Shares can be issued at a discount only if the company complies with legal provisions, primarily issuing sweat equity shares under the Companies Act.
Explain the term ‘Forfeiture of Shares’ and give the accounting treatment on forfeiture.
Forfeiture of shares occurs when a shareholder fails to pay calls due. The accounting treatment involves reversing the entries for calls due and transferring received amounts to the Forfeiture Shares Account.

Numerical Questions

Anish Limited issued 30,000 equity shares of Rs.100 each payable at Rs.30 on application, Rs.50 on allotment, and Rs.20 on the first and final call. All money was duly received. Record these transactions in the journal of the company.

Journal Entries:
1. Bank A/c Dr. 9,00,000
   To Equity Share Application A/c 9,00,000
   (Application money received)

2. Equity Share Application A/c Dr. 9,00,000
   To Equity Share Capital A/c 9,00,000
   (Application money transferred to share capital)

3. Bank A/c Dr. 15,00,000
   To Equity Share Allotment A/c 15,00,000
   (Allotment money received)

4. Equity Share Allotment A/c Dr. 15,00,000
   To Equity Share Capital A/c 15,00,000
   (Allotment money transferred to share capital)

5. Bank A/c Dr. 6,00,000
   To Equity Share First and Final Call A/c 6,00,000
   (Call money received)

6. Equity Share First and Final Call A/c Dr. 6,00,000
   To Equity Share Capital A/c 6,00,000
   (Call money transferred to share capital)

The Adarsh Control Device Ltd. was registered with the authorized capital of Rs.3,00,000 divided into 30,000 shares of Rs.10 each, which were offered to the public. Amount payable as Rs.3 per share on application, Rs.4 per share on allotment, and Rs.3 per share on the first and final call. These shares were fully subscribed and all money was duly received. Prepare journal and Cash Book.

Journal Entries:
1. Bank A/c Dr. 90,000
   To Equity Share Application A/c 90,000
   (Application money received)

2. Equity Share Application A/c Dr. 90,000
   To Equity Share Capital A/c 90,000
   (Application money transferred to share capital)

3. Bank A/c Dr. 1,20,000
   To Equity Share Allotment A/c 1,20,000
   (Allotment money received)

4. Equity Share Allotment A/c Dr. 1,20,000
   To Equity Share Capital A/c 1,20,000
   (Allotment money transferred to share capital)

5. Bank A/c Dr. 90,000
   To Equity Share First and Final Call A/c 90,000
   (Call money received)

6. Equity Share First and Final Call A/c Dr. 90,000
   To Equity Share Capital A/c 90,000
   (Call money transferred to share capital)

Cash Book:
Receipts | Amount | Payments | Amount
---------|--------|----------|-------
Application Money Received | 90,000 | Equity Share Application A/c | 90,000
Allotment Money Received | 1,20,000 | Equity Share Allotment A/c | 1,20,000
Call Money Received | 90,000 | Equity Share First and Final Call A/c | 90,000