In-Depth Notes on Shares and Corporate Accounting

Share Capital

  • Definition: Capital of a company is divided into shares; total capital noted in Memorandum of Association.
  • Shareholders: Owners of share capital; their capital account is collectively called 'Share Capital'.

Types of Shares

  • Equity Shares: Receive dividends after preference shareholders; dividends are not guaranteed.
    • Characteristics:
    • Risky investment; capital returned after all other liabilities in liquidation.
    • Voting rights included.
  • Preference Shares: Have preferential treatment for dividends.
    • Characteristics:
    • Receive fixed dividends before equity shareholders.
    • Often redeemable; limited voting rights.

Issuance of Shares

1. At Par
  • Issued at face value.
  • Example of Entry:
    • Share Capital Account (Dr): 1,00,000
      • Reflects total shares issued.
2. At Premium
  • Issued above face value.
  • Example (Face Value ₹10, Issued at ₹12):
    • Share Capital Account (Dr): 1,00,000
    • Share Premium Account (Dr): 20,000
3. At Discount
  • Issued below face value.
  • Example (Face Value ₹10, Discounted at ₹9):
    • Share Capital Account (Dr): 1,00,000
    • Calls in Arrears Account (Dr): 5,000

Forfeiture of Shares

  • Definition: Process where the company takes back shares because the shareholder has not made due payments.
    • Directors have the authority to forfeit shares for non-payment.
  • Process:
    • Notice issued to inform shareholders of impending forfeiture.
    • Entry on forfeiture:
      • Share Capital A/c (Dr): Amount called up to forfeiture.
      • Share Forfeited A/c (Cr): Net amount forfeited.
      • Calls in Arrears A/c (Cr): Total expected from calls that were unpaid.
Reissue of Forfeited Shares
  • Conditions: Must follow company’s articles; reissued at no more than amounts received.
  • Entry:
    • Bank A/c (Dr): Total amount received.
    • Forfeited Shares A/c (Dr): Discount on reissue.
    • Share Capital A/c (Cr): Total at which reissued.

Restrictions on Issuing Shares

At Premium
  • Can be used for:
    • Issuing Bonus Shares
    • Writing off preliminary expenses
    • Covering issuance costs (commission/discount)
    • Paying premiums on redeemable shares
At Discount
  • Must pass a resolution specifying discounts (max 10%) and cannot be less than one year after the institution of business.

Subscription Concepts

Over Subscription
  • Occurs when more shares are requested than allocated.
    • Example: Issuing 30,000 shares but receiving applications for 45,000 shares.
Under Subscription
  • Fewer shares are applied for than offered.
    • Minimum subscription is 90% for proceeds to be accepted; otherwise, funds returned.

Call in Arrears and Call in Advance

Calls in Arrears
  • Amount due from shareholders not yet paid.
Calls in Advance
  • When shareholders pay amounts due before called upon.

Share Forfeiture Entries

  1. If shares were issued at par:
    • Journal Entries:
      • Forfeited: Share Capital A/c (Dr)
      • To various calls (including unpaid calls)
      • To Share Forfeiture A/c (Cr)
  2. If shares were at premium, similar entries with additional consideration for the premium received.

Conclusion

  • Understanding the various aspects of share capital, including types, issuance methods, forfeiture, and reissue processes, is essential for corporate accounting.