Accounting for Share Capital

Accountancy is an integral subject of the class 12 commerce syllabus. Accounting for share capital is one of the most important chapters of the accountancy syllabus of class 12. If you are thorough with your notes and prepare well, it can be scoring. Here in this blog, we shall discuss this chapter in brief. If you are preparing for your class 12 board exams, it would be of great help. Read on to know more about accounting for share capital class 12.

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What is a Company?

The chapter on accounting for share capital begins with the basics of a company. A joint-stock company is an artificial person created by law and has a separate entity distinct from its members with perpetual succession and a common seal. The features are listed below:

• Artificial person
• Voluntary association
• Created by law
• Capital divisible into transferable shares
• Limited liability
• Perpetual succession
• Common seal
• Separate legal entity from its members
• May sue or be sued

Different Types Of Companies

According to the chapter on accounting for share capital, there are different kinds of companies. They are mentioned below. 

Private Companies

The main features of private companies are as follows: 

• Section 2 (68) of the Companies Act, 2013, defines private companies as “a company with a minimum paid-up share capital of ^ 1,00,000 or such higher amount as may be prescribed in the Companies Act, 2013 and which by its Articles of Association (a) Restricts the right to transfer its shares, if any (b) Except in one-person company, limits the number of its members excluding its present and past employee members to 200; if the past or present employee acquired the shares while in employment and continue to hold them. If any share is held jointly by two or more persons, they shall be treated as a single member. (c) Prohibits any invitation to the public to subscribe for any securities of the company.”
• The number of members that are required to form a private company is two.
• The name of a private company always ends with ‘Private Limited’.

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Public Company

The main features of a public company are as follows: 

• Section 2 (7) of the Companies Act, 2013, defines the public company as a “company which(a) is not a private company. (b) has a minimum capital of Rs 5 lakh or such higher paid-up capital as may be prescribed. c) is a private company, which is a subsidiary of a public company. The minimum requirement of a public company is seven persons.”

 One person company

The main features of a one person company are as follows: 

• It is a company having only one person as a member.
• It is a company incorporated as a private company which has only one member.
• Rule 3 of the Companies (Incorporation) Rules, 2014 provides that:

1. Only a natural person is an Indian citizen and resident in India can form a one-person company or can be nominated for the sole member of a one-person company.
2. One person can form only one ‘one person company’ or become a nominee of one such company.
3. It cannot be formed for charitable purposes.
4. It cannot carry out non-banking financial investment activities, including investment in securities of any body corporate.
5. Its paid-up share capital is not more than Rs 50 lakhs.
6.  Its average annual turnover should not exceed Rs 2 crores.

What is a Share and What are the Types of Shares?

Next, in the chapter on accounting for share capital, we discuss what a share and its types are. Section 2 (84) of the Companies Act, 2013, defines share as “a share in a company’s share capital and includes stock. The capital of the company is divided into several equal units. Each unit is called a share. A company may divide its capital into a share of Rs 100, Rs 50, Rs 10, Rs 5 or even Rs 1 each.”

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Types of Shares

The types of shares as mentioned in the chapter on accounting for share capital are mentioned below. 

• Preference Share: Carries two preferential rights as per Section 43(b) of the Companies Act,2013.

1. Preferential right of dividend has to be paid either as a fixed amount or an amount calculated at a fixed rate( can be free of or subject to income tax.)
2. Return of capital on the winding up of the company before that of equity shares. Holders of preference shares are called preference shareholders.

• Equity Shares: A share which is not a preference share can be called an equity share according to section 43(a) of the Companies Act,2013.

What is a Share Capital?

A share capital is a part of the capital of a company, that is represented by the total nominal value of shares, which has been issued according to the chapter on accounting for share capital. . Kinds of Share Capital are mentioned below.

•  Authorised share capital: As per Section 2(8) of the Companies Act, 2013, ‘authorised capital’ or ‘nominal capital’ is that capital that has been authorised by the memorandum of a company to be the maximum amount of share capital of a company.
• Issued capital:  As per Section 2(50) of the Companies Act, 2013, the issued capital is the capital issued by the company from time to time for the subscription.
• Subscribed capital: As per Section 2(86) of the Companies Act, 2013, ‘subscribed capital’ is that part of a capital that the company members subscribe to for the time being.

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What is a Reverse Capital? 

A reverse capital is a portion of the share capital that cannot be called up except when the company is being wound up as mentioned in the chapter accounting for share capital. 

What is a Capital Reverse?

A capital reverse is a reserve that is not available for free for distribution as a dividend. It is mandatory to create a capital reserve in case of capital profits earned by the company—E.g. premium on issue of shares or debentures, profits on re-issue of shares, profits before incorporation.

Minimum Subscription

Moving further in accounting for share capital, we find out about minimum subscription. The amount stated in the prospectus as the minimum amount that must be subscribed is known as a minimum subscription. Security cannot be allotted unless the sum payable on application for the sum stated has been received by the company either by cheque or other means.

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Accounting Treatment of Issue Shares

According to the chapter on accounting for share capital there are various terms of issues of shares and their utilisation. They are mentioned below. 

Terms of Issues of Shares

• Issue of Debentures at Par: When the issue price and face value of the debentures are the same, debentures are said to be issued at par.
• Issue of Debentures at a Premium: When the issue price is more than the face value, debentures are said to be issued at a premium.

Utilisation of Securities Premium Reserve

Accounting for share capital states that as per Section 52 (2) of the Companies Act, 2013, the use of the amount received as premium on securities has been restricted for the following purposes:

(i) Section 77A- In purchasing its own shares.

(ii) Section 78- a. issuing fully paid bonus shares to the members and writing-off preliminary expenses of the company b. writing-off the expenses of, or the commission paid or discount allowed on any issue of securities or debentures of the company. c. Providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company

Full Subscription of Shares

The shares are said to be fully subscribed when the number of shares that are applied for, is equal to the number of shares offered for subscription.

Oversubscription of Shares

The shares are said to be oversubscribed when the number of shares applied for is more than the number of shares offered for subscription. It must be noted that allotment of shares cannot be made to all the applicants in full. In case there is an over-subscription, the following alternatives are available (i) Rejection of applications (ii) Partial or pro-rata allotment (iii) Combination of pro-rata allotment and rejection.

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Issue of Shares for Consideration other than Cash

We now move forward on the kinds of issue of shares for consideration other than cash as per the chapter on accounting for share capital. 

Issue of Shares to Vendors

In this regard, the purchase of assets and the issue of shares are to be treated as two separate transactions.

• When Assets are Purchased
  Assets A/c (Individually) Dr
  To Vendor
  (Being assets purchased from———-)

• When Business is Purchased
  Sundry Assets A/c Dr
  Goodwill A/c* Dr
  To Sundry Liabilities A/c To Vendor
  To Capital Reserve A/c*

(Being business purchased from vendor for purchase consideration of Rs——-)

NOTE ‘Vendor’ is credited with purchase consideration payable to him *Either goodwill or capital Reserve will come.

• On Issue of Shares
  At Par Vendor
  To Share Capital A/c
  At Premium Vendor
  To Share Capital A/c To Securities Premium Reserve A/c

•  Issue of Shares to Promoters
  Formation Expenses/ Incorporation Cost/Goodwill A/c Dr
  To Share Capital A/c
  (Being … share of Rs … each issued to promoters of the company)

• Issue of Shares to Underwriters
  Making Underwriting Expenses Due
  Underwriting Expenses A/c Dr
  To Underwriters A/c (Being underwriting commission due)

• Issuing Shares to Underwriters
  Underwriters A/c Dr
  To Share Capital A/c
  (Being …shares issued @…….per share to underwriters)

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Calls-in-arrears

When one or more shareholders fail to pay their dues at the time of allotment or call, it is technically called calls-in-arrears according to the chapter on accounting for share capital. Companies Act, 2013, provides for the payment of interest on calls-in-arrears at a rate not exceeding 10% per annum.

Calls-in-advance

The part of the whole amount received from the shareholders before the call is made, is called calls-in-advance. This amount is shown on the liabilities side of the balance sheet as a separate item under the head ‘share capital’ but is not added to the amount of paid-up capital.

Forfeiture of Shares

As per the chapter on accounting for share capital, the cancellation of shares and seizure of the amount already received from defaulting shareholders is known as forfeiture of shares.

(i) Forfeiture of Shares Originally Issued at Par
Share Capital A/c Dr (Called-up money)
To Forfeited Shares A/c (Paid-up money)
To Share Unpaid Calls A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of………….shares for non-payment of call of……….per share)

(ii) Forfeiture of Shares Originally Issued at Premium and Premium was Received
Share Capital A/c Dr (Called-up money)
To Forfeited Shares A/c (Paid-up money)
To Share Allotment A/c (Unpaid money excluding premium)
To Share Unpaid Call A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of …… shares for non-payment of allotment and call of…… per share)

(iii) Forfeiture of Shares Originally Issued at Premium and Premium was not Received
Share Capital A/c Dr (Called-up money)
Securities Premium Reserve A/c Dr (Unpaid premium)
To Forfeited Shares A/c (Paid-up money)
To Share Allotment A/c (Unpaid money including premium)
To Share Unpaid Call A/c (Unpaid money or calls-in-arrears)
(Being forfeiture of …… shares for non-payment of allotment and call of ……per share)

Re-issue of Shares

An important part of the chapter on accounting for share capital is the reissue of shares. The directors can either cancel or re-issue the forfeited shares. Shares that have been forfeited can be re-issued at par, at a premium or a discount.

In case, they are re-issued at par, accounting entry will be

Bank A/c Dr

To Share Capital A/c

In case shares are reissued at a discount, the amount of discount allowed on the re-issue of forfeited shares must not exceed the amount forfeited on re-issued shares. The discount allowed on the reissue of forfeited shares should be debited to the ‘share forfeiture account’. The journal entry will be

Bank A/c Dr [With the amount received on re-issue]
*Share Forfeiture A/c Dr [With the discount allowed on reissue]
To Share Capital A/c [With the amount credited as paid-up]
*It is calculated as
Number of Shares Reissued x (Paid-up Value – Reissue Price Per Share)

If the forfeited shares are reissued at a price higher than that paid-up, the excess is credited to securities premium reserve account. The journal entry will be

Bank A/c Dr
To Share Capital A/c To Securities Premium Reserve A/c
Transfer of Balance in Forfeited Share Account Forfeited Shares A/c Dr
To Capital Reserve A/c (Being balance of share forfeiture account transferred to capital reserve account)

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So, this was all about Accounting for Share Capital. We hope it helps you prepare for your exams and also aids you in revising. If you are confused about which career path to choose after class 12th commerce, get in touch with our Leverage Edu experts. They will help you choose a stream that suits you perfectly and help you carve a niche for yourself. Sign up for a free session today!