LIMITED

LIABILITY
COMPANIES
Prepared by Jenelle Titus

Facilitator: Jenelle Titus Jeffrey

 Objectives

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v i s
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DIFFERENTIATE BETWEEN
AUTHOURIZED AND ISSUED
O A
PREPARE JOURNAL ENTRIES FOR
ISSUE OF SHARES
DIFFERENTIATE BETWEEN
SHARES AND DEBENTURES
CAPITAL
P
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Facilitator: Jenelle Titus Jeffrey
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Authorized Capital
◦ This is information about the total number of shares the company can sell/ issue and the par value of the shares.
◦ Authorized capital is not actually capital, as it does not represent the money received from shareholders invested in the
company.

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EXAMPLE
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Authorized Capital
R e
A
◦ 1 000 000 Ordinary Shares at $2 each
◦ 5 % Preference Shares, 200 000 at $1 each

PO
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This is saying that the company can sell/ issue a maximum of 1 000 000 ordinary shares and a maximum of 200 000

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preference shares. It does not mean that those share have been issued.

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Facilitator: Jenelle Titus Jeffrey
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Issued Capital
Issued capital is the number of shares actually sold/issued by the company at par value. It represents the money received by
capital invested by shareholders.

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Example
Authorized Capital

si o
◦ 1 000 000 Ordinary Shares at $2 each

v i
◦ 5 % Preference Shares, 200 000 at $1 each

Issued Capital
R e
• 900 000 ordinary shares at $2 each

O A
• 5% Preference shares, 150 000 at $1 each
P
C
This means that the company issued only 900 000 of the 1 000 000 ordinary shares it has and 150 000 of the 200 000 preference shares.

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Facilitator: Jenelle Titus Jeffrey
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 Authorized
Capital
The empty glass represents
authorised capital, water in this
case represents capital.

There is no water, so no
capital.

It shows how much ‘Capital’ it

is able to hold.

Facilitator: Jenelle Titus Jeffrey

 Issued Capital

Issued capital shows the actual

amount of capital the company
has.
Just like the amount of water in a
glass.
So authorised capital is an empty
glass, no capital
Issued capital is glass thar has
substance representing capital.
Facilitator: Jenelle Titus Jeffrey
Journal Entries for Issued capital
◦ Journal entries must only be drawn up for issued shares only and never for authorized shares. However students must take
note of the par value of authorized shares.

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Example
Authorized Capital

si o
◦ 1 000 000 Ordinary Shares at $2 each
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◦ 200 000 5 % Preference Shares, at $1 each

R e
A
Issued Capital
• 900 000 ordinary shares at $2 each
• 150 000 5% Preference shares, at $1 each
PO
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Facilitator: Jenelle Titus Jeffrey
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 Journal entries for shares issued at par value
The company issued 900 000 ordinary shares at $2 each and 150 000, 5% preference shares at $1 each

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In this case the shares were issued at par value.

si o
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This means that the total amount of cash received is equal to the total par value of the shares issued

v
e
Total cash received from shares to be entered in cash account = (900 000 x $2) and (150 000 x $1 )

R
Total par Value of shares to be entered in ORDINARY CAPITAL ACCOUNT (900 000 x $2)

A
Total par Value of shares to be entered in PREFERENCE CAPITAL ACCOUNT (150000 X$1)

PO
C
When shares are issued at par value:
Debit – Cash or Bank account with

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Credit- Capital account with par value

Facilitator: Jenelle Titus Jeffrey

 Journal entries for shares issued at par value
DATE DETAILS DEBIT CREDIT
JAN 1 CASH (900 000 X 2) $1 800 000
ORDINARY SHARE CAPITAL

i on $1 800 000

i
(To record Ordinary shares issued at par)

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JAN 1 CASH (150 000 X 1)
R e $150 000

O A
5 % PREFERENCE SHARES $150 000

P
(To record preference shares issued at par)

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Facilitator: Jenelle Titus Jeffrey
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 Journal entries for share above par value
Often shares are sold/issued for an amount that is greater than the par value.
Example
Authorized Capital

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s
◦ 1 000 000 Ordinary Shares at $2 each
◦ 5 % Preference Shares, 200 000 at $1 each
v i
R e
Shares were issued
900 000 ordinary shares for $3 each
O A
150 000. 5% preference shares for $3.50 each P
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Note that the par value is $2 for ordinary shares and $1 for preference shares
Facilitator: Jenelle Titus Jeffrey
 Journal entries for issue of share above par
value
◦ The company issued 900 000 ordinary shares at $3 each and 150 000, 5% preference shares at $3.50

In this case the shares were issued above par value

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This means that the total cash received for share is greater than the total par value of the shares issued

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Share Ordinary share Preference share
Issued amount $3
R $3.50
Par value $2

O A $1

P
Amount above par $1 $2.50

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Facilitator: Jenelle Titus Jeffrey
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Journal entries for shares issued above par value

Total cash received from shares to be entered in cash account = (900 000 x $3) and (150 000 x $3.50 )
Total par Value of shares to be entered in ORDINARY capital account
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(900 000 x $2)

i o
s
Total par Value of shares to be entered in PREFERENCE capital account (150 000 x $1)

v i
R e
In this case to make them equal we use an additional account called SHARE PREMIUM to hold the difference.

A
Amount above par to be entered in share premium ORDINARY SHARE account, = (900 000 x $1)

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Amount above par to be entered in share premium PREFERENCE SHARE account (150 000 x $2.50)

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Facilitator: Jenelle Titus Jeffrey
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Journal entries for shares issued above par value
DATE DETAIL DEBIT CREDIT
JAN 1 CASH (900 000 X 3) $2 700 000
Ordinary Share Capital(900 000 x 2)

i on $1 800 000
Share Premium ( 900 000 x 1)

v i s
To record ordinary shares issued above par
$900 000

R e
JAN 1

O A
CASH (150 000 x 3.50)
5% preference share capital(150 000 x 1)
$525 000
$150 000
P
Share premium (150 000 x 2.50) $375 000

E C
To record preference shares issued above par

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Facilitator: Jenelle Titus Jeffrey
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