Accounting for Share Capital

Share Capital: • The total amount of capital raised by a company by issuing shares to the public • A company divides its total required capital into small equal units called shares • The total par value of all issued shares = Share Capital Types of Share Capital: 1. Authorised Capital (Nominal/Registered Capital): • The maximum amount of share capital that a company is authorised to issue as per its Memorandum of Association • A company cannot issue shares beyond this limit without altering its MOA • Also called Registered Capital or Nominal Capital 2. Issued Capital: • The part of authorised capital that has actually been offered/issued to the public • Issued Capital ≤ Authorised Capital 3. Subscribed Capital: • The part of issued capital that has been subscribed (applied for and accepted) by the public • If fully subscribed: Subscribed Capital = Issued Capital • If under-subscribed: Subscribed < Issued (company accepts applications for lesser number) 4. Called-up Capital: • The portion of subscribed capital that the company has actually demanded (called) from shareholders • Company may not call the entire amount at once; may call in instalments: on Application, on Allotment, on Calls 5. Paid-up Capital: • The portion of called-up capital that shareholders have actually paid • If all shareholders have paid: Paid-up = Called-up • Paid-up Capital = Called-up Capital − Calls in Arrears 6. Uncalled Capital: • The portion of subscribed capital not yet called up = Subscribed Capital − Called-up Capital 7. Reserve Capital: • A portion of uncalled capital that the company reserves to be called only in the event of winding up • Must be authorised by a special resolution; cannot be used during the lifetime of the company

Equity Shares (Ordinary Shares): • Form the main body of share capital of a company • Carry residual claim on assets and profits (after preference shareholders are paid) • Dividend rate is NOT fixed — depends on profits and management decision • Equity shareholders are the real owners — carry voting rights (1 share = 1 vote) • Higher risk — paid last in case of winding up • Higher reward potential — unlimited upside from profits • No right to arrears of dividend • Participate in surplus assets on winding up after all obligations Preference Shares: • Carry preferential rights over equity shares in two ways: (a) Preferential right to receive dividend at a fixed rate before equity shareholders (b) Preferential right to receive repayment of capital before equity shareholders on winding up • Fixed dividend rate specified (e.g., 8% preference shares) • Limited voting rights (only on matters directly affecting their interests, or when dividends are in arrears for 2+ years) • Less risky than equity shares Types of Preference Shares: • Cumulative: Unpaid dividends accumulate and must be paid before equity dividends • Non-cumulative: No carry-forward of unpaid dividends • Redeemable: Can be redeemed (repaid) after a fixed period • Irredeemable: Cannot be redeemed during the life of the company • Convertible: Can be converted into equity shares • Participating: Share in surplus profits along with equity shareholders Comparison table: | Basis | Equity | Preference | |---|---|---| | Dividend | Variable | Fixed | | Risk | High | Low | | Voting | Full | Limited | | Winding up payment | Last | Before equity | | Capital growth | Participates | Limited |

Issue of Shares at Premium: • When shares are issued at a price higher than their face value (par value), the excess is called Securities Premium (Share Premium) • E.g., ₹10 face value share issued at ₹15 → Securities Premium = ₹5 per share • AS 13 and Companies Act 2013 require Securities Premium to be maintained in 'Securities Premium Reserve Account' Uses of Securities Premium (Section 52, Companies Act 2013): • Issue of fully paid bonus shares • Writing off preliminary expenses • Writing off discount on issue of shares/debentures • Providing premium on redemption of preference shares/debentures • Buy-back of own shares Journal Entries (assuming ₹10 face value, ₹5 premium, payable: ₹5 on application, ₹8 on allotment including ₹5 premium, ₹2 on first call): 1. On receipt of application money: Bank A/c Dr. [App. money × No. of shares] To Share Application A/c [Same] 2. On allotment of shares: Share Application A/c Dr. [App. money] To Share Capital A/c [Face value portion] To Securities Premium Reserve A/c [Premium on allotment] To Calls in Advance A/c [Excess application money] 3. On allotment money due: Share Allotment A/c Dr. [Allotment amount] To Share Capital A/c [Face value portion] To Securities Premium Reserve A/c [Premium if on allotment] 4. On receipt of allotment money: Bank A/c Dr. [Amount received] To Share Allotment A/c [Amount] 5. On call money due: Share First Call A/c Dr. [Call amount × shares] To Share Capital A/c [Same] 6. On receipt of call money: Bank A/c Dr. [Amount received] To Share First Call A/c [Amount] (Any shortfall stays in Calls in Arrears A/c)

Forfeiture of Shares: • When a shareholder fails to pay any call money (or allotment money) after a notice period, the company may forfeit his shares • On forfeiture, the shareholder's membership ends and he loses all amounts already paid • The forfeited shares become the property of the company • Company can re-issue these shares Journal Entry for Forfeiture: For shares on which only application and allotment money was paid: Share Capital A/c Dr. [Called-up amount on forfeited shares] To Share Allotment A/c [Amount unpaid on allotment] To Share First Call A/c [Amount unpaid on call] To Forfeited Shares A/c [Amount already received] For shares issued at premium (premium received earlier): Share Capital A/c Dr. [Called-up amount] Securities Premium Reserve A/c Dr. [Premium portion not yet received] To Share Allotment A/c [Unpaid allotment] To Calls in Arrears A/c [Unpaid call] To Forfeited Shares A/c [Amount received on these shares] Note: Securities Premium is reversed ONLY if premium was not paid (i.e., was due on allotment but not received). Journal Entry for Re-issue of Forfeited Shares: Bank A/c Dr. [Amount received on re-issue] Forfeited Shares A/c Dr. [Balance in Forfeited Shares A/c for these shares] To Share Capital A/c [Called-up value] Capital Reserve calculation: Amount in Forfeited Shares A/c − Loss on re-issue = Capital Reserve (Any surplus in Forfeited Shares Account after re-issue = Capital Reserve) Transfer to Capital Reserve: Forfeited Shares A/c Dr. [Surplus] To Capital Reserve A/c [Surplus]

Given: Face value = ₹10; Issue price = ₹12; Premium = ₹2 Issued: 10,000 shares; Applied: 12,000 shares Excess = 2,000 shares worth ₹3 × 2,000 = ₹6,000 excess money 1. On receipt of application money: Bank A/c Dr. 36,000 To Share Application A/c 36,000 (12,000 × ₹3 = ₹36,000) 2. On allotment (accepting 10,000 shares): Share Application A/c Dr. 36,000 To Share Capital A/c 30,000 To Securities Premium Reserve A/c 0 (premium on allotment) To Share Allotment A/c 6,000 (₹3 × 10,000 = ₹30,000 transferred to capital; ₹6,000 excess adjusted) Wait — Application is ₹3, of which none is premium. Application money = ₹3 per share (pure capital) Allotment = ₹5 per share (₹3 capital + ₹2 premium) Final call = ₹4 per share (capital) Total capital per share = 3 + 3 + 4 = ₹10 ✓ Premium = ₹2 on allotment Revised Entry 2 — On allotment: Share Application A/c Dr. 36,000 To Share Capital A/c 30,000 To Share Allotment A/c 6,000 (₹30,000 capital; ₹6,000 excess application adjusted vs allotment due) 3. Allotment due: Share Allotment A/c Dr. 50,000 To Share Capital A/c 30,000 To Securities Premium Reserve A/c 20,000 (10,000 × ₹5 = ₹50,000; of which ₹3 capital + ₹2 premium) 4. Amount received on allotment: Allotment due: ₹50,000 − ₹6,000 adjusted = ₹44,000 remaining Bank A/c Dr. 44,000 To Share Allotment A/c 44,000 5. Final call due: Share Final Call A/c Dr. 40,000 To Share Capital A/c 40,000 (10,000 × ₹4) 6. Final call received: Bank A/c Dr. 40,000 To Share Final Call A/c 40,000