Accounting for Share Capital

Accounting for Share Capital

1. Introduction to Share Capital

Share capital is the amount of money raised by a company through the issue of shares to shareholders. It represents the equity or ownership interest in the company and is a key component of the company’s financial structure.

2. Types of Share Capital

• Authorized Capital: The maximum amount of capital a company is authorized to issue as per its Memorandum of Association.
• Issued Capital: The portion of authorized capital that has been offered to shareholders.
• Subscribed Capital: The portion of issued capital that has been subscribed by shareholders.
• Called-up Capital: The portion of subscribed capital that has been called up for payment by the company.
• Paid-up Capital: The portion of called-up capital that has been paid by shareholders.
• Uncalled Capital: The portion of subscribed capital that has not been called up by the company.
• Reserve Capital: A portion of uncalled capital that a company has resolved to call only in the event of winding up or liquidation.

3. Types of Shares

• Equity Shares: Shares that carry voting rights and entitle the holder to a share in the company’s profits.
• Preference Shares: Shares that carry a fixed rate of dividend and have priority over equity shares in the payment of dividends and repayment of capital.

4. Issue of Shares

Shares can be issued in several ways:

1. Issue at Par: Shares issued at their nominal or face value.
2. Issue at Premium: Shares issued at a price above their nominal value.
3. Issue at Discount: Shares issued at a price below their nominal value (subject to legal provisions).

5. Journal Entries for Issue of Shares

1. Issue of Shares at Par

   Bank A/c                         Dr.
     To Share Capital A/c
   (Being the issue of shares at par)

2. Issue of Shares at Premium

   Bank A/c                         Dr.
     To Share Capital A/c
     To Securities Premium A/c
   (Being the issue of shares at a premium)

3. Issue of Shares at Discount

   Bank A/c                         Dr.
   Discount on Issue of Shares A/c Dr.
     To Share Capital A/c
   (Being the issue of shares at a discount)

6. Calls on Shares

When shares are issued, the company may call for payment in installments:

1. Application Money

   Bank A/c                         Dr.
     To Share Application A/c
   (Being the receipt of application money)

2. Allotment Money

   Share Application A/c            Dr.
     To Share Capital A/c
   (Being the transfer of application money to share capital on allotment)

   Bank A/c                         Dr.
     To Share Allotment A/c
   (Being the receipt of allotment money)

3. Call Money

   Share Allotment A/c              Dr.
     To Share Capital A/c
   (Being the transfer of allotment money to share capital)

   Bank A/c                         Dr.
     To Share Call A/c
   (Being the receipt of call money)

7. Forfeiture of Shares

If a shareholder fails to pay the call money, the company may forfeit the shares:

1. Forfeiture of Shares

   Share Capital A/c                Dr.
     To Share Forfeiture A/c
     To Share Call A/c
   (Being the forfeiture of shares for non-payment of call money)

2. Reissue of Forfeited Shares

   Bank A/c                         Dr.
   Share Forfeiture A/c             Dr.
     To Share Capital A/c
   (Being the reissue of forfeited shares)

   Share Forfeiture A/c             Dr.
     To Capital Reserve A/c
   (Being the transfer of balance in share forfeiture account to capital reserve)

8. Pro Rata Allotment

Pro rata allotment occurs when shares are allotted in proportion to the number of shares applied for, in case of over-subscription.

9. Redemption of Preference Shares

Preference shares can be redeemed subject to certain conditions:

1. Redemption out of Profits

   Profit and Loss Appropriation A/c Dr.
     To Capital Redemption Reserve A/c
   (Being the transfer of profit to capital redemption reserve)

   Preference Share Capital A/c      Dr.
     To Bank A/c
   (Being the redemption of preference shares)

2. Redemption out of Fresh Issue

   Bank A/c                         Dr.
     To Share Capital A/c
   (Being the issue of new shares)

   Preference Share Capital A/c      Dr.
     To Bank A/c
   (Being the redemption of preference shares)

10. Bonus Shares

Bonus shares are issued to existing shareholders out of the company’s reserves or profits:

   Profit and Loss Appropriation A/c Dr.
     To Bonus to Shareholders A/c
   (Being the amount transferred to bonus to shareholders)

   Bonus to Shareholders A/c         Dr.
     To Share Capital A/c
   (Being the issue of bonus shares)

11. Rights Shares

Rights shares are offered to existing shareholders at a predetermined price, giving them the right to purchase additional shares.

12. Disclosure in Financial Statements

Share capital and related transactions must be disclosed in the financial statements, including the balance sheet and notes to accounts, providing details of the types and amounts of share capital, any movements during the period, and any terms and conditions attached to different classes of shares.

Conclusion

Understanding the various aspects of accounting for share capital, including the types of share capital, the process of issuing shares, and the accounting treatment for calls, forfeiture, and redemption, is crucial for accurately reflecting a company’s equity structure in its financial statements.