The compilation of these Accounting for Share Capital Notes makes students exam preparation simpler and organised.
Shares Issued at Par
Shares of a company are actually ownership of a company. So every shareholder is a part-owner of the company in which he owns shares. But it would be impossible to main capital accounts for so many shareholders. So there is a unique share capital account and accounting treatment for the issue of shares. Let us take a look.
Issue of Shares
A company can issue its shares either at par, at a premium, or even at a discount. The shares will be at par is when the shares are sold at their nominal value. Shares sold at a premium cost more than their nominal value, and the amount in excess of the face value is the premium. And of course, shares sold at discount cost less than the face/nominal value.
Now the accounting treatment of all these issues will be slightly different. The money for these shares may also be collected in installments – on the application, allotment, first call, final call, etc. The shares will be fully paid up only after the last installment has been called and paid up.
Shares Issued at Par – Share Capital Account
On Application Money Received
Application of shares does not guarantee the allotment of shares. Some applications will be rejected. So when the application money is received we do not credit the share capital account. For the sake of convenience, we open a new account- a share application account.
This money collected on the application must be deposited in the bank account in a Scheduled Bank according to the Companies Act. This account is exclusively opened to deal with the application money. The journal entry for this transaction in the books of the company is as follows:
On Allotment of Shares
After the company receives minimum subscriptions, it may start allotting the shares. Once the shares are allotted, the applicants now become stakeholders in the company, i.e. they get into a contract with the company. Let us see the journal entries passed in the books of the company in event of allotment.
The first step is that the money received on the application for shares can now finally be transferred to the Share Capital Account since now the allotment has been finalized.
Then there may be the case that certain applications were rejected for any reason. So the money received on the application must now be refunded within the stipulated time frame. The entry for the same will be,
If the allotment was done on a pro-rata basis then the excess application money received must be taken into account. But instead of refunding the money, it can simply be adjusted against the allotment payment due on such allotted shares. Such an adjustment entry will be,
Then the final entry of this stage will be the allotment money becoming due, and finally being paid by the allottee. We will pass two entries for a better understanding of the process. But take note that one combined entry can also be passed instead of two.
On Calls
The installments after the allotment are known as calls, i.e. first call, second call, final call, etc. If the shares are not fully paid up at the time of allotment, then several calls can be made until the shares are fully paid up. However, no call can exceed 25% of the nominal value of shares, and there must be at least one month between two calls.
Calls in Arrears
Sometimes when the company makes a call, the shareholder is unable to pay the call money. In this case, this stakeholder becomes in arrears, and it is called an unpaid call. The company may choose to simply debit the amount from the paid-up capital in the balance sheet. But companies choose to maintain a call-in-arrears account. The following entries are passed in the journal.
Then there are certain times when the calls in arrears are paid by the shareholder. However, the shareholder will have to pay interest for the time delay.
Calls in Advance
Then at times, shareholders pay more than the call amount. Such cases are called calls in advance. The excess amount received is a liability for the company. The following entry is passed when such advance is received and then is adjusted against the next call.
Example:
Question:
On an equity share of Rs.20, the company has called up Rs,18 but actually received Rs.16 only. The share capital would be credited by _______
a. Rs.18
b. Rs.16
c. Rs.20
d. None of the above
Answer:
The correct option is “a”.
Share Capital will be credited with the entire amount called up, i.e. Rs 18/-. The Rs 2/- not received may be in Calls-in-Arrears A/c.