Share Capital

Main divisions of share capital Nominal or Registered or Authorised Issued capital Subscribed capital Called up capital Paid up capital Reserve capital

Balance Sheet of Co Ltd. as on…. LiabilitiesAmountAssetsAmount Share capital Authorised Capital… shares of Rs… each Issued Capital… shares of Rs …each Subscribed capital… shares of Rs….each Called and paid up capital …shares of Rs…each Rs … called up. xxx Less Calls in arrear xxx Add Share forfeited xxx Reserves and surplus XXX

Types of shares There are two types of shares: (i) Equity shares Equity shares may be with differential rights. (ii) Preference shares Cumulative preference share Non cumulative preference shares Redeemable preference shares Non redeemable preference shares Participating preference shares Non participating preference shares

Stock As per section 94(1)(c) of the Companies Act 1956, when all the shares of a company have been fully paid up, they may be converted into stock if so authorised by the Articles of Association. Stock is another type of unit of capital of a company. Conversion of shares into stock is made because it is a convenient method of denoting the capital of a company.

Difference between shares and stocks Shares 1. Shares may be fully paid up or partly paid up. 2. Shares may be issued when a company is incorporated. 3. Shares cannot be divided below the face value of each share. 4. Shares are serially numbered. 5. Shares are of equal denomination. 6. Shares are always registered and are not transferable by mere delivery. Stocks 1. Stocks are always fully paid up. 2. Stocks cannot be issued at incorporation. Only fully paid shares can be converted into stock. 3. Stocks can be issued or transferred in fractional parts. Hence a convenient method of transferring. 4. Stocks are not numbered. 5. Stocks may be divided into unequal amounts. 6. Stock may be registered or unregistered. Unregistered stock can be transferred by mere delivery.

Issue of shares Terms of issue of shares Application of shares Allotment of shares Calls on shares Shares can be issued either at 1. Par 2. Premium 3. Discount

Journal entries for issue of share capital 1. On receipt of application money: Bank A/c Dr. To share application A/c (Being the application money on share) 2. (a) On allotment of shares: Share application A/c Dr. To share capital A/c (Being the application money transferred to share capital A/c)

2. (b) Those applicants who could not be allotted any share, their application money will be returned. Share application A/c Dr. To bank A/c (Being the application money of shares returned) 3. On the allotment of shares, the allotment money becomes due to the company. Share allotment A/c Dr. To share capital A/c (Being the share allotment money due on Rs….per share)

4. On receipt of allotment money. Bank A/c Dr. To share allotment A/c (Being the receipt of allotment money) 5. On making the first call due from shareholders Share first call A/c Dr. To share capital A/c (Being the first call money due Rs…per share )

6. On receipt of the call money. Bank A/c Dr. To share first call A/c (Being share first call share received) Note: Similar entries will be passed for second, third and final call if any.

Issue of shares for purchase of assets (i.e consideration other than cash) If the shares have been allotted to any person or firm from whom the company has purchased any asset: Asset A/c Dr. To share capital A/c (Being…shares allotted…in consideration other than cash for purchase of an asset for the company) This fact should also be disclosed in the B/S while showing the issued subscribed and paid up capital.

Issue of shares at premium A company may issue shares at a premium i.e. at a value greater than its face value. Premium so received shall be credited to a separate account called Securities Premium Account.

Journal entry for issue of shares at premium (a) If the premium is paid with application money. (i)Bank A/c Dr. To share application A/c (Being share application money along with premium received) (ii)Share application A/c Dr. To share capital A/c To securities premium A/c (Share application money transferred to share capital A/c and securities A/c)

(b) If the securities premium is received along with the allotment money. (i)Share allotment A/c Dr. To share capital A/c To securities premium A/c (Being the allotment money and securities premium money due on…shares) (ii)Bank A/c Dr. To share allotment A/c (Being the receipt of allotment alongwith share premium account)

(c) If securities premium is to be received along with different calls then it will be credited to Securities Premium account at the time of passing the due journal entry.

Purposes for which Securities Premium A/c may be applied by the company-Sec For the issue of fully paid bonus shares to the members of the company. 2. For writing off preliminary expenses of the company. 3. For writing off the expenses of the commission paid or discount allowed on any issue of shares or debentures of the company. 4. For providing premium payable on the redemption of any redeemable preference shares or debentures of the company 5. For purchase of its own shares (buyback ) (Section 77 A) As per Section 78 Securities premium cannot be utilised for payment of dividend.

Issue of shares at a discount A company can issue shares at a discount i.e. value less than the face value subject to the following conditions: 1. The issue of shares at a discount is authorised by a resolution passed by the company in general meeting and sanctioned by the Central Govt. 2. The resolution must specify the maximum rate of discount which should not exceed 10% of the nominal value of shares or such higher percentage as the Central Govt. may permit. 3. One year must have elapsed since the date at which the company was allowed to commence business.

4. Shares issued at a discount must belong to a class of shares already issued. 5. Issue must take place within two months after the date of the sanction by the court or within such extended time as the court may allow. 6. Every prospectus relating to the issue of shares and every B/S after the issue of shares contain particulars of the discount allowed and so much of the discount as has not been written off. Thus shares cannot be issued at discount if: (i) It is a new company ;or (ii) Shares issued are of a new class even though issued by an old company.

Journal entry for issue of shares at discount Discount allowed at the time of allotment: Share allotment A/c Dr. Discount on issue of shares A/c To share capital A/c Discount on issue of shares will be shown under miscellaneous head on the assets side of the B/S till it is completely written off from P&L A/c.

Over Subscription of shares When the number of shares applied for exceed the number of shares issued. Usually the following procedure is adopted: Total rejection of some application. Acceptance of some applications in full and Allotment to the remaining applicants on a pro rata basis.

Under subscription of shares When the number of shares applied for are less than the number of shares issued.

Calls in Arrears If any amount has been called by the company, either as allotment or call money and a shareholder has not paid that money, such amount not received is known as calls in arrear. If the company directors want and there is a provision in Articles of Association, the company can charge 5% for the period for which such amount remained in arrear from the shareholders.

Journal entries for calls in arrear ( i) Calls in arrear A/c Dr. To Relevant call (Being call money is in arrears) (ii) Bank A/c Dr. To calls in arrears (Being amount received) (iii) Shareholders A/c Dr. To interest on calls in arrear (Being interest due) (iv) Bank A/c Dr. To shareholders A/c (Being interest received) (v) Interest on calls in arrear A/c Dr. To P&L A/c (Being closing the interest on calls in arrears)

Calls in advance If any call has been made but while paying that call, some shareholders has paid the amount of the rest of calls also, then such amount will be called as calls in advance and will be credited to a separate account known as calls in advance account. Generally interest is paid on such calls according to the provisions of the Articles of Association but such rate should not exceed 6% per annum. Calls in advance are not entitled for any dividend declared by the company. Calls in advance account is shown on the liabilities side of the B/S separately from the paid up capital.

Journal entries for calls in advance (i)Bank A/c Dr. To calls in advance A/c (Being amount received in advance) (ii) Calls in advance A/c Dr. To relevant call A/c Dr. (Being transferred to relevant call A/c (iii)Interest on calls in advance A/c Dr. To Shareholders A/c (Being interest due on call ) (iv)Shareholders A/c Dr. To bank A/c (Being interest paid to shareholders) (v) P&L A/c Dr. To interest on calls in advance (Being transferring in expense in P&L A/c)

Forfeiture of shares When a shareholder fails to pay calls, the company, if empowered by its articles, may forfeit the shares. Shares once forfeited become the property of the company and may be sold on such terms as directors think fit. Forfeiture of shares brings about compulsory termination of membership and the company takes away the shares from member by way of penalty for non payment of allotment and/or call money. Though the shares are forfeited, in the event of winding up of the company, the shareholders whose shares are forfeited but not reissued, are liable as per provisions of Section 426 of the Companies Act,1956 for the unpaid calls, due on the date of forfeiture.

Journal entries for forfeiture Share capital A/c Dr. Securities Premium A/c Dr. To Share allotment A/c To Unpaid calls A/c To Discount on issue of shares To Shares forfeited A/c Share forfeited account balance will be shown on the liabilities side of the B/S by way of addition to the paid up share capital till such time that all forfeited shares are reissued.

Surrender of shares After the allotment of shares, sometimes a shareholder is not able to pay the further calls and returns his shares to the company for cancellation. Such voluntary return of shares to the company by the shareholder himself is called surrender of shares. The same entries (as are passed incase of forfeiture of shares) will be passed incase of surrender of shares.

Distinction between surrender of shares and forfeiture of shares Surrender of shares 1. It is at the initiative of the shareholder concerned. 2. The procedure for reduction of share capital as provided in Section 100 of the Companies Act should be followed. 3. The shareholder is estopped from questioning validity in surrender of shares. Forfeiture of shares 1. It is at the instance of the company. 2. No such procedure is followed for forfeiture of shares. 3. The shareholder can challenge the defects in the notice for forfeiture of shares.

Reissue of forfeited shares The forfeited shares can be reissued at par or at premium or discount. If such shares are issued at a discount then amount of discount should not exceed the actual amount received on forfeited shares plus original discount on reissued shares, if any. When reissued at par: Bank A/c Dr. To share capital A/c (Being amount received)

When reissued at premium: Bank A/c Dr. To share capital A/c To Securities Premium A/c When reissued at discount: (a) When the shares originally issued at par or premium are reissued at discount. Bank A/c Dr. Share forfeited A/c Dr. To share capital A/c (b) When the shares originally issued at discount are reissued at discount. Bank A/c Dr. Discount on issue of shares A/c Dr. Share forfeited A/c Dr. To share capital A/c

Capital profit on reissue of shares Case 1- After reissue of all forfeited shares if there is (a) No balance in shares forfeited account, then there will be no capital profit. (b) Credit balance in shares forfeited account, such profit should be treated as capital profit and the balance will be transferred to Capital Reserve A/c. Shares Forfeited A/c DR. To Capital Reserve A/c Capital Reserve will be shown on the liabilities side of the B/S and can be used for writing off capital losses.

Case 2- When all forfeited shares are not reissued: The amount relating to that part of Shares Forfeited Account which has not been reissued should be shown on the liabilities side of the B/S as Shares Forfeited A/c.

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