ADVANCED ACCOUNTING III

BUSINESS ACCOUNTING 2

BY FRANKWOOD

LECTURE 9
THE INCREASE AND DECREASE IN SHARE
CAPITAL OF LIMITED LIABILITY COMPANIES
 Alteration of Capital
A limited company may, if authorized by its articles, and if the correct legal formalities are
observed, alter its share capital in any of the following ways:
1 Increase its share capital by issuing new shares
2 Consolidate and divide all or any of its share capital into shares of a larger nominal value than its
existing shares
3 Convert all or any of its paid-up shares into debentures, and reconvert those debentures into
shares of any denomination
4 Subdivide all, or any, of its shares into shares of smaller denominations,
5 Cancel shares which have not been taken up. This is known as ‘diminution of capital’, and is
not to be confused with ‘reduction of capital’, described later in the chapter.
Bonus shares
These are shares issued to existing shareholders free of charge. An alternative name often
used is scrip issue.
If the articles give the power, and the requisite legal formalities are observed, the following
may be applied in the issuing of bonus shares:
1 The balance of the profit and loss appropriation account.
2 Any other revenue reserve.
3 Any capital reserve, e.g. share premium.
Rights issue
A company can also increase its issued share capital by making a rights issue. This is the
issue of shares to existing shareholders at a price lower than the ruling market price of the
shares. The price at which the shares of a very profitable company are quoted on the Stock
Exchange is usually higher than the nominal value of the shares.
Reduction of capital
o Where capital is not represented by assets

Capital reduction means that the share capital – all of it if there is only one class such as
ordinary shares, or all or part of it if there is more than one class of shares – has been
subjected to a lessening of its nominal value, or of the called-up part of the nominal value.
For Example:
(a) a £4 share might be converted into a £3 share;
(b) a £5 share might be converted into a £1 share;
(c) a £3 share, £2 called up, might be converted into a £1 share fully paid up;
(d) a £5 share, £3 called up, might be converted into a £3 share £1 called up;
The accounting entries are:
1 For amounts written off assets:
Dr Capital reduction account
Cr Various asset accounts
2 For reduction in liabilities (e.g. creditors):
Dr Liability accounts
Cr Capital reduction account
3 The reduction in the share capital:
Dr Share capital accounts (each type)
Cr Capital reduction account
4 If a credit balance now exists on the capital reduction account:
Dr Capital reduction account (to close)
Cr Capital reserve
It is unlikely that there would ever be a debit balance on the capital reduction account, as the court would
rarely agree to any scheme which would bring this about.
Capital reduction schemes for private companies are used less frequently now than previously, thanks to
companies having been granted the right to purchase their own shares.
o Where some of the assets are no longer needed

Where some of the firm’s assets are no longer needed, probably due to a contraction in the
firm’s activities, a company may find itself with a surplus of liquid assets. Subject to the legal
formalities being observed, in this case the reduction of capital is effected by returning cash to the
shareholders, i.e.:
1 Dr Share capital account (with amount returnable)
Cr Sundry shareholders
2 Dr Sundry shareholders
Cr Bank (amount actually paid)
Such a scheme could be objected to by the creditors if it affected their interests.
THANK YOU