Corporate accounts- share capital

INTRODUCTION
Two major limitations of sole proprietorship concerns and
partnership firms are:
1. Inadequacy of funds
2. Unlimited Liability
To overcome these limitations, one of the most convenient form
of organization was formed called JOINT STOCK COMPANY
In India, joint stock companies are governed by provisions of
the Companies Act, 1956

COMPANYAccording to section 3 (1)(i) of the Companies Act,1956 “A company
formed and registered under this Act or an existing company.”
CHARACTERISTICS: 1.Incorporated Association
2. Separate legal entity
3. Limited Liability
4. Separate property
5. Perpetual succession
6. Transferability of shares

DIFFERENCE B/W PRIVATE
COMPANY AND PUBLIC COMPANY
Basis Private Company Public Company
1. No. of members Minimum: 2
Maximum: 50
Minimum: 7
Maximum: Unlimited
2. Issue of prospectus Cannot issue prospectus Must issue prospectus
3.Transfer of shares Restricted Freely transferable
4. Commencement of
business
Can commence after getting
Certificate of Incorporation
Can commence after getting
the Certificate of
Commencement
5. No. of Directors At least two At least three
6. Quorum for meetings Quorum is two Quorum is five
7. Use of word ‘Limited’ ‘Private Limited’ must be used
at the end of the name
‘Limited’ must be used at the
end of the name

DOCUMENTS REQUIRED FOR
FORMATION OF A COMPANY
Memorandum of
Association
Articles of
Association
A Statement of
the Nominal
Capital
A List of
Directors
Written consent
of Directors
Notice of
Address of the
Registered
Office
A Statutory
Declaration

DIVISIONS OF SHARE CAPITAL
Amount of capital with which the company intends
to be registered
Nominal or
Registered
Capital
The part of authorized capital which is offered to
the public for subscription
Issued Capital
That part of the issued capital for which
applications are received from the public
Subscribed
Capital
The potion of the subscribed capital which is
called up by the company
Called-up Capital
The part of called up capital which is actually paid
by the members
Paid-up Capital
A part of share capital which has not been called up
and shall not be capable of being called up except in
the event of winding up of the company
Reserve Capital

DIFFERENCE B/W RESERVE
CAPITAL AND CAPITAL RESERVE
Basis Reserve Capital Capital Reserve
1. Nature It is a part of uncalled capital It is the accumulated profit, e.g.,
gain on sale of fixed assets, gain on
forfeited shares, etc.
2. Disclosure It is usually not shown in the
Balance Sheet. A note may be
given for this
It is shown in the liabilities side of
Balance Sheet under the heading
Reserve and Surplus
3.Time of
Receipt
Being uncalled capital, the
amount is receivable only at
the time of liquidation
The amount of capital reserve is
already received
4. Usage It issued only at the time of
liquidation of the company, if
required
This is used to write off all the
capital losses or for issue of bonus
shares, etc.

TYPES OF SHARES
Preference Shares
Cumulative Preference Shares
Non cumulative Shares
Redeemable Preference Shares
Participating or non-
participating Preference Shares
Equity Shares

DIFFERENCE B/W SHARES
AND STOCKS
Basis Shares Stocks
1. Payment Fully paid up or partially
paid-up
Fully paid-up
2. Issue May be issued when a
company is incorporated
Only fully paid up shares can
be converted to stock
3.Transferability Shares cannot be divided
below face value
Shares can be divided below
face value
4. Numbering Are serially numbered Cannot be numbered
5. NominalValue Are of equal nominal value Divided into unequal
amounts
6. Denomination Generally of equal
denomination
Of unequal denomination

BOOK BULIDING
• SEBI guidelines, 1995 defines book building as a
process undertaken by which a demand for the
securities proposed to be issued by a body corporate is
elicited and built-
up and the price for such securities is assessed for the
determination of the quantum of such securities to be
issued by means of a notice, circular, advertisement,
document or information memoranda or offer
document.
Book building process is a common practice used in mo
st
developed countries for marketing a public offer of equ
ity shares of a company. However, book building is a
transparent and flexible price discovery method of
initial public
offerings(IPOs) in which price of securities is fixed by th
e issuer company along with the Book Running Lead
Manager (BRLM)on the basis of feedback received
from investors as well as market intermediaries during
a certain period.
BOOK
BUILDING

JOURNAL ENTRIES FOR ISSUE
OF SHARES
Serial
No.
Particulars Dr.
Balance
Cr. Balance
Rs. Rs.
Bank A/c Dr.
To Share Application A/c
(Being application money received)
Share Application A/c Dr.
To Share Capital A/c
(Being application money transferred)
Share Allotment A/c Dr.
(Being share allotment money due)
Bank A/c Dr.
To Share Allotment A/c
(Being allotment money received)

Serial
No.
Particulars Dr.
Balance
Cr.
Balance
Rs. Rs.
Share 1st Call A/c Dr.
(Being 1st call due)
Bank A/c Dr.
To Share 1st Call A/c
(Being 1st call money received)
Share Final Call A/c Dr.
(Being share final call money due)
Bank A/c Dr.
To Share Final Call A/c
(Being final call money received)

QUESTION - 1
ABC Ltd. invited applications for 1000 shares of Rs.10
each on 1st January, 2002. The payments to be made
as follows:
Rs.3 on application; Rs.3 on allotment; Rs.4 on 1st call
The issue was fully subscribed and the amounts due on
allotment and first call have been received.

ISSUE OF SHARES AT A PREMIU
(SECTION 78)
A company may issue shares at a premium i.e., at a value
greater than its face value.
According to SEBI, Only a company with a 5-year track record
of consistent profitability, it will be free to price its issue
provided:
The participation of the promoting companies is not less than
50% of the equity of the new company
The issue price is made applicable to all new
investors uniformly
The prospectus contains justification for issue
price
Securities premium cannot be utilized for payment
of dividend

PURPOSES FOR WHICH
SECURITIES PREMIUM MAY BE
APPLIED BY THE COMPANY:
Issue of fully
paid up bonus
shares
Writing off
preliminary
expenses
Writing off
the expenses
of the
commission
paid or
discount
allowed on
any issue of
shares or
debentures
Providing
premium
payable on
the
redemption of
any
redeemable
preference
shares or
debentures
For purchase
of its own
shares
(buyback)
[Sec 77A]

• If premium is paid with application money. Then the
following entry will be passed:
• If premium is paid with application money. Then the
following entry will be passed:
Serial
No.
Particulars Dr. Balance Cr. Balance
Rs. Rs.
Share ApplicationA/c Dr.
To Securities Premium A/c
Serial
No.
Rs. Rs.
To Securities Premium A/c

EXAMPLE 2
ABC Ltd. invited applications for 1000 shares of Rs.10
each at a premium of Rs.2 on 1stJanuary, 2002. The
payments to be made as follows:
Rs.3 on application; Rs.5 on allotment (including
premium); Rs.4 on 1st call
The issue was fully subscribed and the amounts due on
allotments and first call have been received. Pass necessary
Journal Entries.

ISSUE OF SHARES AT A
DISCOUNT (SECTION 79)
A company can issue shares at discount i.e., value less than the face value subject to the
following conditions:
• The issue of shares at a discount is authorized by a resolution passed by the company in
general meeting and sanctioned by the Central Govt
• 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
• One year must have elapsed since the date at which the company was allowed to
commence business
• Shares issued at a discount must belong to a class of shares already issued
• Issue must take place within two months after the date of sanction by the court or
within such extended time as the court may allow
• Every prospectus relating to the issue of shares and every balance sheet after the issue
of shares should contain the particulars of the discount allowed and so much of the
discount as has been written off

• It can be thus concluded that shares cannot be
issued at discount if:
It is a new company
Shares issued are of a new class even though
issued by an old company
• Journal Entry to be passed:
• Discount on issue of shares will be shown under
miscellaneous head on the assets side of the Balance
Sheet till its completely written off from the P&L
A/c
Serial
No.
Particulars Dr.
Balance
Cr.
Balance
Rs. Rs.
Discount on Issue of Shares A/c Dr.

Over subscription of Shares
When applications received exceed the number invited,
the share is said to be over-subscribed. It also means
that the company received more application money than
what was originally invited.
1). If the excess amount is refunded to applicants
2). If the excess amount is adjusted to Allotment
Serial
No.
Particulars Dr.
Balance
Cr.
Balance
Rs. Rs.
Share ApplicationA/c Dr. To Bank
A/c
Serial
No.
Particulars Dr.
Balance
Cr.
Balance
Rs. Rs.
Share ApplicationA/c Dr. To Share
Allotment A/c

EXAMPLE 3
On 1st January 2003 ABC Ltd. invited applications for 1000
shares of Rs. 10 each.The payments to be made as follows:
Rs.3 on application
Rs.3 on allotment
Rs.4 on 1st call
Applications have been received for 1200 shares. Excess
applications have been rejected. Allotments were made.The
full amounts collected in due course.
Pass necessary Journal Entries to record the above.

Under subscription
The company has received less number of applications than what was
invited. In case of under subscription the company will proceed to
allotment with whatever number of shares applied by the public.
EXAMPLE 4
• On 1st January 2003 ABC Ltd. invited applications for 1000 shares of Rs.
10 each.The payments to be made as follows:
• Rs.3 on application; Rs.4 on allotment; Rs.3 on 1st call
• Applications have been received for 900 shares. Allotments were made.
The full amounts collected in due course.
• Pass necessary Journal Entries to record the above

Calls in advance
Sometimes shareholders chose to pay the call money in advance
which should be credited to calls in advance account.
Oversubscription of issue is another reason for opening Calls in
Advance Account
Interest is paid on the calls in advance if it is specified in the in
the Articles of Association of the company or if the company
adoptsTable A for internal administration interest can be paid at
the rate of 6%.

ENTRIES :
• Interest Due
• Interest Paid
Serial
No.
Particulars Dr.
Balance
Cr.
Balance
Rs. Rs.
Interest on Calls in Advance A/c Dr. To
Sundry Shareholders A/c
Serial
No.
Particulars Dr.
Balance
Cr.
Balance
Rs. Rs.
Sundry Shareholder’s A/c Dr. To Bank
A/c

EXAMPLE 5
ABC Ltd. invited applications for 1000 shares of Rs.10 each on
1st January, 2002. The payments to be made as follows:
The issue have been fully subscribed. Mr. A, who is allotted
300 shares, paid the full amount at the time of allotment.The
amounts due on allotment and first call have been received.
Pass necessary Journal Entries.

Calls in arrear
Sometimes shareholders fail to pay the amount
due on calls. In that case we have two options in
passing the journal entry.
• Recording the actual amount collected to the respective
call account.The unpaid amount will remain in the books in
the call account as debit balance
• Debit the Bank account for the amount received and debit
the Calls in Arrears Account for the unpaid amount and
credit the respective call account for the total.
The company can charge
interest on calls in arrears
at 5% per annum if it is
specified in the Articles of
Association or if the
company adoptsTable A for
the internal administration.

EXAMPLE 6
ABC Ltd. issued 1000 shares of Rs.10 each on 1st January, 2002.The
The issue have been fully subscribed. Mr. A, who is allotted 300
shares failed to pay the 1st call amount.The full amounts due on
allotment and first call from all other shareholders have been
received. Pass necessary Journal Entries

Issue of share for consideration
other than cash
Company can issue shares in consideration of purchase of
assets.
Following journal entries are passed for such issue:
Serial
No.
Particulars Dr.
Balance
Cr.
Balance
Rs. Rs.
a) AssetA/c Dr.
ToVendor’s Account (Asset
purchased)
b) Vendor’s Account Dr.
To Share Capital
(Shares issued in consideration of asset)

EXAMPLE 7
On 1st January 2002, ABC Ltd. Purchased a building for
Rs.99,000 from Deepa constructions, for which they issued
equity shares at the par to the vendor.
Pass necessary journal entries.

EXAMPLE 8
On 1st January 2002, ABC Ltd. purchased a building for Rs.99,000
from Deepa constructions, for which they issued equity shares at a
discount of 10% to the vendor. Pass necessary journal entries.

EXAMPLE 9
On 1st January 2002, ABC Ltd. purchased a building
for Rs.99,000 from Deepa constructions, for which
they issued equity shares at a premium of 10% to the
vendor. Pass necessary journal entries

Forfeiture of shares-
Accounting treatment
If a shareholder has not paid any call on the day fixed for
payment thereof and fails to pay it even after his
attention drawn to it by the secretary by registered
notice, the Board of Directors pass a resolution to the
effect that such shares be forfeited.
Shares once forfeited become the property of the
company and may be sold on such terms as directors
think fit.

JOURNAL ENTRIES:
• Forfeiture of shares issued at par
Share Capital Account Dr. (called up value of shares
forfeited)
To Share ForfeitureAccount (paid up portion of forfeited
shares)
To Calls in arrears (the unpaid amount of the respective
calls)

EXAMPLE 9
ABC Ltd. invited applications for 1000 shares of Rs.10 each on
1st January, 2002.The payments to be made as follows:
The issue have been fully subscribed.The amounts due were
collected for allotment and 1st call with the exception of Mr A,
having 300 shares who failed to pay for the allotment and first
call.These shares have been forfeited. Pass necessary Journal
Entries.

Forfeiture of shares issued
at premium
a. Where premium was collected
Share CapitalAccount Dr. (the capital value)
Securities Premium Account Dr. (the premium on forfeited
shares)
To Share Forfeiture Account (the amount collected on
shares)
ToVarious Calls Account (the unpaid amount on shares)

EXAMPLE 10
ABC Ltd. invited applications for 1000 shares of Rs.10 each at a
premium of Rs.2 per share on 1st January, 2002.The payments to
be made as follows:
Rs.3 on application; Rs.5 on allotment (including premium); Rs.4
on 1st call
collected with the exception of Mr. A, who is allotted 300 shares
and failed to pay for the allotment and first call.These shares have
been forfeited. Pass necessary Journal Entries

• b. where premium not collected
Share CapitalAccount Dr. (only the capital value)
To Share Forfeiture Account (capital collected on
shares)
ToVarious Calls Account (capital unpaid amount on
shares)
• EXAMPLE 12
ABC Ltd. invited applications for 1000 shares of Rs.10 each at
a premium of Rs.2 per share on 1st January, 2002.The
Rs.3 on application; Rs.5 on allotment (including premium);
Rs.4 on 1st call
The issue was fully subscribed.The amounts due were
collected with the exception of Mr. A, who is allotted 300
shares and failed to pay for the first call.These shares have
been forfeited. Pass necessary Journal Entries.

• Notice here that the calls in arrears account
contains only unpaid capital. No unpaid premium..
Therefore there is no need of debiting the Premium
Account.You can close the unsettled account by
just reversing the Capital Account alone.

Forfeiture of shares issued at
discount
When shares issued at discount are forfeited, the
discount account must be reversed irrespective of
the point at which default occurs.This is because
the capital account itself includes discount in it.
Share Capital Account Dr. (the value of shares)
To Discount (amount of discount allowed on
shares)
ToVarious Calls (amount unpaid on calls)

EXAMPLE 14
ABC Ltd. invited applications for 1000 shares of Rs.10 each at a
discount of Re.1 per share on 1st January, 2002. The
collected with the exception of Mr. A, who is allotted 300
shares and failed to pay the allotment and first call.These
shares have been forfeited. Pass necessary Journal Entries

Re-issue of Forfeited Shares
• Forfeited shares may be reissued by the directors of the company
for any amount but if such shares are issued at a discount then the
amount of discount should not exceed the actual amount received
on forfeited shares plus original discount on reissued shares, if any.
• The following entry is passed:
BankA/c Dr. (Amount received on such reissue)
Discount on Reissue of Shares A/c Dr. (with original rate of
discount and if the shares originally were issued at a discount)
Shares Forfieted A/c Dr. (Loss on reissue of shares)
To Share Capital A/c (With face value of shares)
To Securities Premium A/c (If shares are reissued at a
premium)

EXAMPLE 15
X Ltd. Invited applications for 10,000 shares of Rs.100 each at a
discount of 6% payable as follows:
On application Rs.25
On allotment Rs.34
On first and final call Rs. 35
The applications were received for 9,000 shares and all of these
were accepted.All money due was received except the first and
final call on 100 shares which were forfeited. 50 shares were
reissued @ Rs.90 as fully paid. Pass entries in the journal.

ANSWER:
Serial
No.
Rs. Rs.
Bank A/c Dr.
To Share Application A/c
(Being application money received)
2,25,000
2,25,000
Share Application A/c Dr.
(Being application money transferred)
2,25,000
2,25,000
(Being share allotment money due)
3,06,000
54,000
3,60,000
Bank A/c Dr.
To Share Allotment A/c
(Being allotment money received)
3,06,000
3,06,000

Rs. Rs.
Share 1st & Final Call A/c Dr.
(Being 1st call due)
3,15,000
3,15,000
Bank A/c Dr.
To Share 1st Call A/c
(Being 1st call money received)
3,11,500
3,11,500
Share Capital A/c Dr.
To Share 1st & Final Call A/c
To Discount on Issue of Shares A/c
To Shares Forfeited A/c
(Being 100 shares forfeited)
10,000
3,500
600
5,900
Shares Forfeited A/c Dr.
(Being 50 shares reissued)
300
200
500
Shares Forfeited A/c Dr.
To Capital Reserve A/c
(Being profit on reissue transferred)
2,750
2,750

Corporate accounts- share capital

Corporate accounts- share capital

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