TYBAF SEM-5 FINANCIAL ACCOUNTING -5

CHAPTER 1:- BUY BACK OF SHARES

Buy Back of Shares Means - Purchase back of shares by Company

Buy back of Equity Shares Redemption of Preference Shares

This can be Done By

a) Proceeds of fresh issue of shares
b) By using Free Reserves;
(Free reserve are transferred to CRR & then Bonus shares can be issued out of CRR)
Introduction: - Buyback means the repurchase of its own shares by the company. In other
words buyback of own share happen when the company decides to purchase of equity share
from open market. After the buyback of share, the share capital of company is reduce and at
the same time Debt Equity Ratio will Increase. Buyback of shares leads to rise in earnings per
share.
 Limits of Buy Back (Legal Provisions Regarding Buyback under section 68)
1. 25% of Total Outstanding Equity Shares (In Numbers):- Total number of shares to
be brought back cannot be exceeds 25% of paid up equity shares of company.
2. 25% of (Paid up Capital + Free Reserves)/Buy Back Price per share. (It includes
Securities premium, P&L A/c, General Reserve but not Statutory Reserve).
The total expenditure incurred on purchase of own equity share should not
exceeds 25% of Paid up capital (Equity + Preference) and Free Reserve / divisible
Profit (It includes Securities premium, P&L A/c, General Reserve but not Statutory
Reserve).
3. Post buy back “Debt Equity Ratio” shall not exceed 2:1
Debt equity ratio after buy back should not exceed to 2:1
Journal Entries
Sr. No. Particulars L/f Debit Credit
Part- A: If shares are partly paid up
1. For Second and Final Call Due
Share Second and Final call a/c -------------------------------------------Dr. xxx
To Equity share capital a/c xxx
2. For Second and Final Call Money Received
Cash & Bank a/c -------------------------------------------------------------Dr. xxx
To Share Second and Final call a/c xxx
Part- B: If shares are Fully paid up (V.IMP)
1. For Fresh Issue
1.a. Issue At PAR
Cash & Bank a/c -------------------------------------------------------------Dr. xxx
To Preference share capital a/c xxx
or Issue At Premium (IMP)
1.b. Cash & Bank a/c -------------------------------------------------------------Dr. xxx
To Preference share capital a/c xxx
To Securities Premium a/c xxx
or Issue At Discount (Not IMP)
1.c. Cash & Bank a/c -------------------------------------------------------------Dr. xxx
Discount on issue of shares a/c---------------------------------------------Dr. xxx
To Preference share capital a/c xxx

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TYBAF SEM-5 FINANCIAL ACCOUNTING -5
Note: Fresh Issue include issue of Preference Share only. It Does not include issue of Debenture.
2. For Sale of Investment
2.a. Sale At no Profit / no Loss
Cash & Bank a/c -------------------------------------------------------------Dr. xxx
To Investment a/c xxx
or Sale At Profit
2.b. Cash & Bank a/c -------------------------------------------------------------Dr. xxx
To Investment a/c xxx
To Profit / Loss a/c xxx
or Sale At Loss
2.c. Cash & Bank a/c -------------------------------------------------------------Dr. xxx
Profit/ Loss a/c----------------------------------------------------------------Dr. xxx
To Investment a/c xxx
3. For Buy Back Due
3.a. At PAR
Equity share capital a/c------------------------------------------------------Dr. xxx
To Equity shareholders a/c xxx
or At Premium (IMP)
3.b. Equity share capital a/c------------------------------------------------------Dr. xxx
Premium on Buyback a/c----------------------------------------------------Dr. xxx xxx
To Equity shareholders a/c
or At Discount (Not IMP)
3.c. Equity share capital a/c------------------------------------------------------Dr. xxx
To Equity shareholders a/c xxx
To Capital Reserve xxx
4. For Transfer to Capital Redemption Reserves
General Reserve a/c---------------------------------------------------------Dr. xxx
Profit / Loss a/c--------------------------------------------------------------Dr. xxx
Securities Premium a/c-----------------------------------------------------Dr. xxx
To Capital Redemption Reserve a/c xxx
5. For Write off Premium on Buyback
General Reserve a/c---------------------------------------------------------Dr. xxx
Profit / Loss a/c--------------------------------------------------------------Dr. xxx
Securities Premium a/c-----------------------------------------------------Dr. xxx
To Premium on Buyback a/c xxx
6. For payment to Equity shareholder
Equity Shareholders a/c ---------------------------------------------------Dr. xxx
To Cash & Bank a/c xxx
Part- C: Fully paid Bonus Share
1. For Bonus Due
Capital Redemption Reserve a/c------------------------------------------Dr. xxx
Capital Reserve a/c----------------------------------------------------------Dr. xxx
Securities Premium a/c-----------------------------------------------------Dr. xxx
General Reserve a/c---------------------------------------------------------Dr. xxx
Profit / Loss a/c--------------------------------------------------------------Dr. xxx
To Bonus to Equity Shareholder a/c xxx
2. For Bonus transferred to Equity Shareholder
Bonus to Equity Shareholders a/c ----------------------------------------Dr. xxx
To Equity share capital a/c xxx
Part- C: Issue of Debenture:
If in the question information about issue of debenture is given, Then one Separate Journal entry
will be pass for the same. But it does not included in fresh issue.
Cash & Bank a/c -------------------------------------------------------------Dr. xxx
To Debenture a/c xxx
To Securities Premium a/c xxx

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TYBAF SEM-5 FINANCIAL ACCOUNTING -5
Important Point:-
 In this chapter securities premium is included in divisible profit.
 Buyback can be done only if equity share is fully paid up.
 If Equity share are partly paid up in that case, we have to covert the partly paid up share into fully
paid share for the purpose of buyback.
 In the Eye of law CRR is just like capital of company. CRR can only use for the purpose of fully paid
bonus share.
 Whatever amount is use from the divisible profit for the purpose of Face Value Buyback, That
amount should be transferred to CRR.
 Transfer to Capital Redemption Reserves = Nominal Value shares Redeemed - Nominal Value of
shares issued

Buy back has effect on mainly 3 items of Balance sheet

Share Capital Reserve & Surplus Cash & Cash Equivalent

(-) Buy Back Premium Payable

(+) Proceeds of New issue
(+) New Shares Capital Redemption Reserves
(-) Payment of Buy Back
(+) Bonus Bonus

 Divisible profit / Free Reserve include following reserve

i. General Reserve v. Securities Reserve
ii. Profit and loss a/c vi. Investment fluctuation Reserve
iii. Revenue Reserve vii. Fund after deducting liabilities if any.
iv. Dividend equalization Reserve viii. Any other free reserve.

 Non Divisible profit

i. Capital Reserve iii. Sinking Fund
ii. Capital Reduction Reserve iv. Revaluation Reserve
 Buy Back of Market Value of shares
MV = FV AT PAR
MV > FV AT Premium
MV< FV AT Discount

Face Value of Equity Share buy back

Fresh Issue Divisible Profit (Including securities Premium)

# Transfer to CRR
Premium on Buyback

Securities Premium Divisible Profit (Not Transfer to CRR)

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TYBAF SEM-5 FINANCIAL ACCOUNTING -5

Short Cut Trick For Balance sheet of company

Schedule III (Part-1)
Balance Sheet as at 31st March, 20.....
Short Cut Trick Particulars Note No. Amt. (Rs)
st
1 Trick I EQUITY AND LIABILITIES
Suraj A Shareholder’s Funds (IMP)
Sota Hai a Share Capital (IMP) xxx
Rat b Reserve and Surplus (IMP) xxx
Me to c Money received against share warrants xxx
Niraj B Non-current Liabilities (IMP)
Light a Long term borrowings (IMP) xxx
Disconnect aur b Deferred tax liabilities (net) xxx
Off kar c Other long term liabilities xxx
Leta Hai aur d Long term provisions xxx
Chetan C Current Liabilities (IMP)
Subah a Short-term borrowings (IMP) xxx
Thoda b Trade payables (IMP) xxx
Our c Other current liabilities (IMP) xxx
Sota Hai d Short-term provisions (IMP) xxx
Total xxx
2nd Trick II Assets
Netra A Non-current Assets (IMP)
Find a Fixed assets (IMP)
Television (i) Tangible assets (IMP) xxx
Is (ii) Intangible assets (IMP) xxx
Costly (iii) Capital work-in-progress xxx
In (iv) Intangible assets under development xxx
New b Non-current investments (IMP) xxx
Delhi c Deferred tax assets (net) xxx
Located d Long-term loans and advances xxx
Office e Other non-current assets (IMP) xxx
Chitra said B Current Assets (IMP)
Currently in a Current investments (IMP) xxx
Indore b Inventories (IMP) xxx
Television is c Trade receivables (IMP) xxx
Cheapest & d Cash and cash equivalents (IMP) xxx
Some e Short term loans and advances (IMP) xxx
Offers f Other current assets (IMP) xxx
Total xxx

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When number of share buy-back is not given but offer price is given:
Computation of No. of Share Buy - Back
Sr. No. Particulars ` `
A Reserve and Surplus (Free Reserve only Including Securities Premium)
Securities Premium xxx
General Reserve xxx
Profit and Loss A/c xxx
Total Reserve and Surplus (A) xxx
B 25% of own Funds/ Shareholder Fund
Reserve and Surplus (Total of A) xxx
Equity Share Capital (Including final Call Money) xxx
Preference Share Capital xxx
Total Own Fund / Shareholders Fund xxx
25% of Own Funds (Total Own Funds × 25%) (B) xxx
C Minimum Own Funds (Debt Equity Ratio Check)
Total Own Funds xxx
Less: 50% of Total Debts (50% of Total Borrowed Funds) (xxx)
Minimum Own Funds (C) xxx
D 25% of Paid up Equity Share
a. Maximum no. of Shares (Total No. of Equity Shares × 25%) xxx
b. Offer Price or Market Price xxx
Buy - Back at offer price (a × b) (D) xxx
Maximum amount of Buy-Back (Lowest from A or B or C or D) xxx
𝐌𝐚𝐱𝐢𝐦𝐮𝐦 𝐀𝐦𝐨𝐮𝐧𝐭 𝐨𝐟 𝐁𝐮𝐲 − 𝐁𝐚𝐜𝐤
𝐌𝐚𝐱𝐢𝐦𝐮𝐦 𝐧𝐨. 𝐨𝐟 𝐬𝐡𝐚𝐫𝐞 𝐁𝐮𝐲 𝐁𝐚𝐜𝐤 =
𝐎𝐟𝐟𝐞𝐫 𝐏𝐫𝐢𝐜𝐞 𝐨𝐫 𝐌𝐚𝐫𝐤𝐞𝐭 𝐏𝐫𝐢𝐜𝐞
When number of share buy-back is not given but offer price is also not given:
Computation of No. of Share Buy - Back and Offer Price/ Market Price
Sr. No. Particulars ` `
A Reserve and Surplus (Free Reserve only Including Securities Premium)
Securities Premium xxx
General Reserve xxx
Profit and Loss A/c xxx
Total Reserve and Surplus (A) xxx
B 25% of own Funds/ Shareholder Fund
Reserve and Surplus (Total of A) xxx
Equity Share Capital (Including final Call Money) xxx
Preference Share Capital xxx
Total Own Fund / Shareholders Fund xxx
25% of Own Funds (Total Own Funds × 25%) (B) xxx
C Minimum Own Funds (Debt Equity Ratio Check)
Total Own Funds xxx
Less: 50% of Total Debts (50% of Total Borrowed Funds) (xxx)
Minimum Own Funds (C) xxx
Maximum amount of Buy-Back (Lowest from A or B or C) xxx
D 25% of Paid up Equity Share
Maximum no. of Shares Buy Back (Total No. of Equity Shares × 25%) xxx
𝐌𝐚𝐱𝐢𝐦𝐮𝐦 𝐚𝐦𝐨𝐮𝐧𝐭 𝐨𝐟 𝐁𝐮𝐲 − 𝐁𝐚𝐜𝐤
Offer Price or Market Price = xxx
𝐌𝐚𝐱𝐢𝐦𝐮𝐦 𝐧𝐨. 𝐨𝐟 𝐒𝐡𝐚𝐫𝐞𝐬 𝐁𝐮𝐲 𝐁𝐚𝐜𝐤

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