Corporate Accounts

Lecture 2

Share Capital Transactions

Pavan Kumar M

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 Learning Objectives

 Meaning and Categories of Share Capital

 Meaning, Nature and Classes of Shares
 Distinction between and an Equity Share and Preference
Share
 Accounting treatment for Issue of Shares at par,
premium, and discount
 Accounting treatment for forfeiture of shares and reissue
of shares
 Accounting treatment for redemption of redeemable
preference shares

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Meaning and categories of Share Capital

Share capital means the capital raised by the issue of shares.

The amounts invested by shareholders towards the face value
of shares are collectively known as “share capital”.

The share capital is divided under the following three heads:

Authorized Capital – This refers to that amount which is

stated in the “capital clause” of the Memorandum of
Association as the share capital of the company.

This is the maximum limit of the company which it is

authorized to raise and beyond which the company cannot raise
unless the capital clause in the Memorandum is altered in
accordance with statutory provisions.
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Issued Capital – That part of the authorized capital which is
offered to the public for subscription.

Subscribed Capital – That part of the issued capital for which

applications are received from the public. (Paid-up value of the
issued capital)

Called-up Capital – That portion of the subscribed capital which

has been called-up by the company.

Paid-up Capital – The part of the called-up capital which is

offered and is actually paid by the members is known as paid-up
capital.

Reserve Capital – Portion of uncalled share capital which shall

not be capable of being called up except in the event and for the
purposes of the company being wound up. (sec. 99)

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Authorized capital
10,00,000 Equity shares of Rs. 10 each 10,000,000
   
Issued capital Authorized capital
 
10,00,000 Equity shares of Rs. 10 each 10,000,000
8,00,000 Equity shares of Rs. 10 each
   
8,000,000
Issued capital  
  8,00,000 Equity shares of Rs. 10 each 8,000,000
 
   
Subscribed CapitalSubscribed Capital    
6,00,000 Equity Shares of Rs. 10 each 6,000,000
6,00,000 Equity Shares of Rs. 10 each
    6,000,000
Called-up Capital  
  6,00,000 Equity Shares of Rs. 10 each Rs. 8 called up 4,800,000  
   
Called-up Capital Paid-up Capital    
6,00,000 Equity shares Rs. 10 each, Rs. 8 called up 4,800,000
6,00,000 Equity Shares of Rs. 10 each Rs. 8 called up
Less: Calles in arrears on 50,000 Equity shares of @ Rs. 5 each 250,000 4,800,000
  4,550,000
   
Paid-up Capital  
6,00,000 Equity shares Rs. 10 each, Rs. 8 called up 4,800,000
Less: Calles in arrears on 50,000 Equity shares of @ Rs. 5 each 250,000
  4,550,000
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Meaning, nature and classes of shares

A share is one unit into which the total share capital is

divided.

According to the section 2(46) of the Company’s Act 1956,

share means a part in the share capital of the company and it
also includes stock except where a distinction between stock
and share capital is made expressed or implied.

As per the provision of section 85 of the Companies Act,

1956, the share capital of a company consists of two classes of
shares, namely:
◦ Preference Shares
◦ Equity Shares

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Preference shares
 A right to receive dividend at a stipulated rate or of a fixed
amount before any dividend is paid on equity shares.
 A right to receive repayment of capital on winding up of a the
company, before the capital of equity shareholders is
returned.

Preference shareholders do not have any voting rights, but in

the following conditions they can enjoy the voting rights:
 In case of cumulative preference shares, if dividend is
outstanding for more than two years.
 In case of non-cumulative preference shares, if dividend is
outstanding for more than three years.
 On any resolution of winding up.
 On any resolution of capital reduction.

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Types of Preference shares
 Cumulative Preference Shares: Cumulative preference
shares are those shares on which arrears of dividend
accumulate and will be paid in the subsequent years.
Preference shares are always deemed to be cumulative
unless any express provision is mentioned in the
Articles.

 Non-Cumulative Preference Shares: Non-cumulative

preference shares are those shares on which arrear of
dividend do not accumulate. Therefore if divided is not
paid on these shares in any year, the right receive the
dividend lapses and as such, the arrear of divided is not
paid out of the profits of the subsequent years.

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 Participating Preference Shares: Participation preference shares
are those shares, which, in addition to the basic preferential rights,
also carry one or more of the following rights:
 To receive dividend, out of surplus profit left after paying the
dividend to equity shareholders.
 To have share in surplus assets, which remains after the entire
capital has been paid on winding up of the company.

 Non-Participating Preference Shares: Non-participation preference

shares are those shares, which do not have the following rights:
 To receive dividend, out of surplus profit left after paying the
dividend to equity shareholders.
 To have share in surplus assets, which remains after the entire
capital has been paid on winding up of the company.
 Preference shares are always deemed to be non-participating, if the
Article of the company is silent.

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 Convertible Preference Shares: Convertible preference shares are those
shares, which can be converted into equity shares on or after the specified
date according to terms mentioned in the prospectus.

 Non-Convertible Preference Shares: Non-convertible preference shares,

which cannot be converted into equity shares. Preference shares are
always being to be non-convertible, if the Article of the company is silent.

 Redeemable Preference Shares: Redeemable preference shares are those

shares which can be redeemed by the company on or after the certain
date after giving the prescribed notice. These shares are redeemed in
accordance with the terms and sec. 80 of the Company’s Act 1956.

 Irredeemable Preference Shares: Irredeemable preference shares are

those shares, which cannot be redeemed by the company during its life
time, in other words it can be said that these shares can only be redeemed
by the company at the time of winding up. But according to the sec. 80
(5A) of the Company’s (Amendment) Act 1988 no company can issue
irredeemable preference shares.

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Equity Shares

According to section 85 (2), of Companies Act, 1956,

Equity share can be defined as the share, which is not
preference shares. In other words equity shares are those
shares, which do not have the following preferential
rights:

 Preference of dividend over others.

 Preference for repayment of capital over others at the
time of winding up of the company.

These shares are also known as ‘Risk Capital’

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 Equity shares Vs Preference shares
Basis of difference Preference Share Equity Share
Rate of dividend The rate of dividend on preference share The rate of dividend on equity
is fixed. share is changed from year to
Basis of difference Preference Share year
Equity Sharedepending upon the
Rate of dividend
availability
The rate of dividend on preference The rate of dividend on equity
share is fixed. share is changed of profits.
from year to year
Payment of dividend They have a right to receive dividend profits. Dividend on equity shares is
depending upon the availability of

before any dividend

Payment of dividend
is paid on equity paid, after any dividend is paid
They have a right to receive Dividend on equity shares is paid,
dividend before any dividend is after any dividend is paid on
shares.
Participation in management
paid on equity shares.
on preference shares.
preference shares.
Preference shareholders are not Equity shareholders are entitled to
Participation Preference shareholders
entitled
management.
to
are not entitled
participate
Equity shareholders are entitled
in participate in management.

In management Winding up to participate in On management.

the winding up, they have a In this case,tothey
participate
have been paidin management.
right to return of capital ahead only when preferences capital is
(before) of the capital returned on paid in full.
equity shares.
Winding up On the winding
Arrears of dividend up, they
If dividend is not have
paid on a right
these to of In
In case this
equity case,
shares, they have been paid
dividend
return of capital ahead (before) of the only when preferences capital is
shares in any year, the arrear of cannot accumulate.
dividend may accumulate.
Voting rights
capital returned onanyequity shares. rights. paid in full.
Preference shareholders do not Equity shareholders enjoy voting
have voting rights.

Arrears of dividend If dividend is not paid on these shares in In case of equity shares,
any year, the arrear of dividend may dividend cannot accumulate.
accumulate.
Voting rights Preference shareholders do not have any Equity shareholders enjoy
voting rights. voting rights. 12
 Issue of shares
Conditions Treatment

1 Record the receipt of application money

.
a) When number of shares applied Transfer the full amount of application money received to
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is equal to the number of shares Share Capital A/c.
.
issued.
If the minimum subscription has at least been received:
a) When number of shares applied Transfer the full amount of application money received to
are less than the number of Share Capital A/c.
shares issued.
If the minimum subscription has not been received:
Refund the total application money to all the applicants.
3 Make due the allotment money on shares allotted.
.
4 Record the receipt of allotment money.
.
5 Make due the call money on shares allotted.
.
6 Record the receipt of call money.
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.
Issue of shares at par: Shares are said to be issued at
par when they are issued at a price equal to the face
value. For example, if a share of Rs. 10 is issued at Rs. 10

Issue of shares at premium: When shares are issued at

an amount more than the face value of share, they are
said to be issued at premium. For example, if a share of
Rs. 10 is issued at Rs. 15

Issue of shares at discount: Shares are said to be

issued at a discount when they are issued at a price
lower than the face value. For example if a share of Rs.
10 is issued at Rs. 9

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Accounting entries for issue of shares
Par Premium Discount
For receipt of application money
Bank A/c Dr Bank A/c Dr Bank A/c Dr
To Share application A/c To Share application A/c To Share application A/c

For transferring application money to Share Capital A/c

Share application A/c Dr Share application A/c Dr Share application A/c Dr
To Share capital A/c To Share application A/c Discount on issue of shares A/c Dr
To Security Premium A/c To Share application A/c

For allotment money becoming due

Share allotment A/c Dr Share allotment A/c Dr Share allotment A/c Dr
To Share capital A/c To Share capital A/c Discount on issue of shares A/c Dr
To Security Premium A/c To Share application A/c

For receipt of allotment money

Bank A/c Dr Bank A/c Dr Bank A/c Dr
To Share allotment A/c To Share allotment A/c To Share allotment A/c

For call money becoming due

Share call A/c Dr Share call A/c Dr Share call A/c Dr
To Share capital A/c To Share application A/c Discount on issue of shares A/c Dr
To Security Premium A/c To Share application A/c

For receipt of call money

Bank A/c Dr Bank A/c Dr Bank A/c Dr
To Share call A/c To Share call A/c To Share call A/c

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Calls-in-arrears
Calls-in-arrear is the amount called up by the company, but not
paid by the shareholders. The directors can charge interest on
calls-in-arrears at a rate not exceeding 5% p.a.

◦ For calls-in-arrear:
Bank A/c Dr
To Share allotment A/c
To Share call A/c

◦ For receipt of amount at subsequent date:

Bank A/c Dr
To Share allotment A/c
To Share call A/c
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 Calls-in-advance
Calls-in-advance is the amount not called up by the company, but
paid by the shareholders. Interest is allowed on calls-in-advance.
6% - as per Table A.

For receipt of advance money: For adjustment of calls-in-advance:

Bank A/c Dr Calls-in-advance A/c Dr
To Share allotment A/c To Respective call A/c
To Share call A/c
To Calls-in-advance A/c

On making the interest on call-in-advance due: For payment of interest on calls-in-advance:

Interest on calls-in-advance A/c Dr Shareholder’s A/c Dr
To Shareholder’s A/c To Bank A/c

For transferring interest on calls-in-advance A/c to P/L A/c at the end of the accounting year:
Profit and Loss A/c Dr
To interest on calls-in-advance A/c

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Example 1

ABC Corporation Ltd was registered on 1st January, 2010 with

a capital of Rs 10,00,000 divided into 1,00,000 shares of Rs.
10 each. The company offered 44,000 shares of which 40,000
shares were taken up by the public and Re 1 per share was
received with application. On 1st February, these shares were
allotted and Rs. 2 per share was duly received on 28th February
as allotment money. A first call of Rs. 3 per share was made
on 1st March and the call money on all shares with the
exception of 100 shares was received. The final call of Rs 4
per share was made on 1st June and the amount, due, with the
exception of 400 shares, was received by 30th June.
Pass the necessary Journal entries and prepare balance sheet as
at 30the June. 2010.

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