SHARE CAPITAL

Basic Accounting Entries for Issue of Shares

The procedure for accounting for the issue of both equity and preference shares is the same. However, the words 'equity share' or 'preference share' is prefixed to the installments in .order to differentiate between the two. The amount of money paid with various installments represents the contributions to share capital and should ultimately be credited to Share Capital Account.

Section 42(6) read as follows:

“A company making an offer or invitation under this section shall allow its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than —

a)for adjustment against allotment of securities; or

b)for the repayment of monies where the company is unable to allot securities.”

The company, in its books, passes the following entry for the application money received.

On Application –

Journal Entry is as follows:

Bank A/c            Dr.

To Share Application A/c

 (Amount received on application for — shares @ Rs. ______ per share)

On Allotment :

When minimum subscription has been received and certain legal formalities on the allotment of shares. The allotment of shares implies a contract between the company and the applicants who now become the allottees and assume the status of shareholders or members.

For Transfer of Application Money:

 Share Application A/c Dr.

  To Share Capital A/c

(Application money on _____ Shares allotted/ transferred to Share Capital)

 For Money Refunded on Rejected Application :

Share Application A/c Dr

 To Bank A/c

 (Application money returned on rejected application for ___shares)

For Amount Due on Allotment

 Share Allotment A/c Dr.

 To Share Capital A/c

 For Adjustment of Excess Application Money

Share Application A/c Dr.

To Share Allotment A/c

 For Receipt of Allotment Money

 Bank A/c Dr.

To Share Allotment A/c

(Allotment money received on ___Shares @ Rs. — per share Combined Account)

A combined account for share application and share allotment called ‘Share Application and Allotment Account’

Journal entries are recorded in the following manner :

For Receipt of Application and Allotment Bank A/c Dr.

 To Share Application and Allotment A/c

For Transfer of Application Money and Allotment Amount Due

 Share Application and Allotment A/c Dr.

    To Share Capital A/c

 For Money Refunded on Rejected Applications  

Share Application and Allotment A/c Dr

 To Bank A/c

  

On Receipt of Allotment Amount

Bank A/c Dr.

 To Share Application and Allotment A/c

A combined account for share application and share allotment called ‘Share Application and Allotment Account’

1) Share Application or share allotment or Share capital A/c all are personal accounts as they represent money from the shareholders and when money is due, these are to be debited because of the rule "Debit the receiver".
And, Share Capital A/c being Capital is nature in increased with every call due so it is to be credited.
2) Share Forfeiture, Securities premium and Capital Reserve, all are nominal accounts as they represent loss and gain to the business concern.

 On Calls :

Calls play a vital role in making shares fully paid-up and for realising the full amount of shares from the shareholders.

 The Journal entries are as given below:

For Call Amount Due

Share Call A/c Dr.

To Share Capital A/c

For Receipt of Call Amount

 Bank A/c Dr.

To Share Call A/c

A ltd issued 20,000 shares of Rs. 10 payable as Rs. 4 on application, Rs. 3 on allotment and Rs. 3 on first call &  final call.

Application received for 25,000 shares. The company decided to issue shares on pro-rata basis and decided to utilise the excess money towards allotment.

Find the excess amount adjusted towards allotment.

Working note –

25,000  - 20,000

Applied – allotted

Excess shares – 5000 shares

Excess application money- 5000* 4 = 20,000

To be adjusted for allotment

Particular	Dr	Cr
Bank A/c  Dr To share application ( Being share application received for 25000 shares)	1,00,000	1,00,000
Share Application A/c Dr To share Capital To share allotment ( Being 20,000 shares allotted on pro rata basis)	1,00,000	80,000 20,000
Share Allotment a/c Dr To Share capital ( Being Share allotment due)	60,000	60,000
Bank A/c Dr To Share Allotment ( Being allotment money received)	40,000	40,000
Share first & final call a/c Dr To share capital ( Being share first & final call due)	60,000	60,000
Bank A/c dr To share first & final call ( being share final call received)	60,000	60,000

Issue of Shares for Consideration other than cash

The purchase of an asset against the issue of shares comprises two distinct transactions:

 (1) the purchase of an asset (on credit)

Asset A/c Dr ,

 To Vendors

(Asset purchased from the Vendors)

 Vendors Dr.

 To Share Capital A/c

 To share premium

A plot of land and building appurtenant thereto was purchased for Rs.1,80,000 payable in shares worth Rs. 12. Find the value of shares along with amount to be credited in the security premium reserve.

No of shares =  purchase consideration

  face value of share / face value + premium

Solution –

No of shares to be issued = 1,80,000 /12  =  15,000 shares

Share capital = 15000*10 = 1,50,000

Security premium reserves = 1,80,000-1,50,000 = Rs. 30,000

Some conservative accountants prefer to consider the issue of such shares as 'incorporation costs' arid so debit this amount to Incorporation Costs Account.

The entry thus will be:

 Goodwill/Incorporation Costs A/c Dr.

To Share Capital A/c

Calls in arrears

where a company maintains ‘Calls in Arrears’ Account, it needs to pass the following additional journal entry:

 Calls in Arrears A/c Dr.

 To Share First Call Account A/c

To Share Second and Final Call Account A/c

When the shareholder makes the payment of calls in arrears together with interest, the entry will be as follows:

Bank A/c Dr.

To Calls in Arrears A/c To Interest A/c

(Calls in arrears received with interest)

Calls in Advance

The following journal entry is recorded for the amount of calls received in advance.

 Bank A/c Dr.

 To Calls in Advance A/c

(Amount received on call in advance)

On the due date of the calls, the amount of ‘Calls in Advance’ is adjusted by the following entry :

 Calls in Advance A/c Dr.

To Particular Call A/c

(Calls in advance adjusted with the call money due)

Forfeiture of Shares

some shareholders fail to pay one or more installments, viz. allotment money and/or call money. In such circumstances, the company can forfeit their shares, i.e. cancel their allotment and treat the amount already received thereon as forfeited to the company within the framework of the provisions in its articles.

Forfeiture of Shares issued at Par:

Share Capital A/c..........(Called up amount) Dr.

To Share Forfeiture A/c...........(Paid up amount)

To Share Allotment A/c

To Share Calls A/c (individually)

                                                    

The journal entry to record the forfeiture of shares issued at a premium on which premium has not been fully received, will be :

 Share Capital A/c Dr.

 Securities Premium A/c Dr.

 To Share Forfeiture A/c

 To Share Allotment A/c and/

or

To Share Calls A/c (individually)

• Calls in advance is shown as-

a)Income in profit & loss account

b)Expense in profit & loss account

c)Asset in balance sheet

d)Liability in the balance sheet

Answer – d) Liability in the balance sheet

Explanation-

Calls in advance is the amount paid by shareholders before the call. It is a liability for the organisation.

Re-issue of shares-

The directors can either cancel or re-issue the forfeited shares. In most cases, they reissue such shares which may be at par, at premium or at a discount. Forfeited shares may be reissued as fully paid at a par, premium, discount.

The necessary journal entry will be:

Bank A/c Dr.

Share Forfeiture A/c Dr.

To Share Capital A/c

Share Forfeiture A/c Dr.

 To Capital Reserve

(Profit on reissue of forfeited shares transferred)

Utilization of Security Premium reserve-

1.  in paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or
2.  in writing off the expenses of or the commission paid or discount allowed on
3. In writing off preliminary expenses
4. any issue of equity shares of the company; or
5.  for the purchase of its own shares or other securities under section 68.