Accounting for Share Capital

Definition

When a company wants to start or expand its business, it divides its total capital into small units of a fixed denomination called a "Share". The aggregate value of these shares is known as "Share Capital".

According to the Companies Act: Share capital refers to the capital raised by a company through the issue of shares.
According to Prof. W. J. Weston: Share capital represents the monetary contribution made by the owners of a corporation, evidenced by certificates of ownership called shares.

Explanation

• Imagine a huge pizza cut into equal slices. Each slice is a share representing proportional ownership.
• A share is movable property transferable in the manner provided by the articles of the company.
• Every share is distinguished by its appropriate number.
• Shareholders have limited liability up to the face value of the shares they hold.

Examples

• TechNova Limited: Needs 1,000,000 units to build a tech park, divided into 100,000 shares of 10 units each.
• RetailMart: Issues 50,000 shares of 50 units each to raise 2,500,000 units for opening new stores.

Real-Life Use & Misconceptions

Real-Life Use: Companies launch Initial Public Offerings (IPOs) to invite public investment, raising share capital to fund operations, R&D, and expansion.

Misconception & Correction: A shareholder cannot walk into the office and claim a desk or chair. Shareholders own the legal entity, but daily operations are managed by the Board of Directors.

Concise Takeaway

Shares are fractional units of ownership, and their total collection is share capital, which fuels corporate growth.

Definition

A company categorizes share capital into different stages to maintain transparency and control, governed by regulatory frameworks like the Memorandum of Association.

Explanation

• Authorized Capital: Maximum limit a company can legally raise (stated in Memorandum).
• Issued Capital: Portion of authorized capital actually offered to the public.
• Subscribed Capital: Portion of issued capital accepted/subscribed by the public.
• Called-up Capital: Amount the company has actually asked shareholders to pay.
• Paid-up Capital: Actual money received from shareholders.
• Reserve Capital: Uncalled capital reserved to be called only upon winding up.

Comparison Table

Examples

• Apex Motors has an authorized capital of 10,000,000 units, issues 6,000,000 units, and public subscribes to 5,000,000 units.
• BlueSky Ltd calls up 8 units out of a 10 unit share. Shareholders pay 7 units, leaving 1 unit as calls in arrears.

Concise Takeaway

Capital moves through clear statutory stages from authorization to full payment.

Definition

The process of offering shares to the public, institutional investors, or existing members to raise capital is known as the issue of shares (creation and allotment of ownership securities in exchange for cash or other considerations).

Explanation

• Systematic process involving invitation (application), acceptance (allotment), and collection of installments (calls).
• Shares can be issued at Par, at Premium, or historically at Discount (restricted nowadays).

Examples

• Company X issues 10,000 shares of 10 units each at par, payable as 3 units on application, 4 units on allotment, and 3 units on first and final call.

Modern Tools

Share transfer and issuance are managed using digital registrar portals, cloud accounting tools like QuickBooks Enterprise, and blockchain-based cap-table management software like Carta.

Concise Takeaway

Issuing shares involves systematic stages of inviting, allotting, and collecting funds securely via modern software platforms.

Definition

This refers to the journal entries passed when money is received in installments from applicants and shareholders, staggering capital inflow to match operational funding requirements.

Explanation

• Application money is received first, then transferred to Share Capital.
• Allotment and call amounts are made due first via a due entry, and then the receipt entry is recorded.
• Separate ledger accounts are maintained: Share Application Account, Share Allotment Account, and Share Call Accounts.

Examples (Journal Entries)

• Receiving application money: Bank Account Dr. To Share Application Account.
• Transferring application money: Share Application Account Dr. To Share Capital Account.

Concise Takeaway

Staggered payments require precise journal entries distinguishing between receipt-first (application) and due-first (allotment/calls) workflows.

Definition

Calls in arrears are unpaid calls due from defaulting shareholders. Calls in advance are amounts received prior to formal demand.

Explanation

• Calls in Arrears reduce the total paid-up capital (deducted in Balance Sheet).
• Calls in Advance are treated as a current liability since the company owes that money or will adjust it against future calls.
• Interest is applicable: Arrears may carry interest (e.g., up to 12% p.a.), and Advance may earn interest (e.g., up to 6% p.a.) as per articles of association.

Examples

• Holding 100 shares, failure to pay final call of 2 units results in Calls in Arrears = 200 units.
• Prepaying final call of 3 units on 500 shares during allotment results in Calls in Advance = 1,500 units.

Concise Takeaway

Arrears represent unpaid dues reducing capital, while advance represents prepaid liabilities earning interest.

Definition

Shares can be issued at face value (Par), above face value (Premium), or below face value (Discount). Premium excess is credited to a Securities Premium Reserve Account.

Explanation

• Securities Premium is a restricted capital reserve shown under Reserves and Surplus; it cannot be used for paying cash dividends.
• Under modern company laws, ordinary shares cannot be issued at a discount to the general public.

Examples

• Issue of 1,000 shares of 10 units each at 12 units (2 units premium credited to Securities Premium Reserve).

Concise Takeaway

Par is face value, premium is extra capital receipt credited to a restricted reserve account, and general discounts are prohibited.

Definition

Share forfeiture is the cancellation of shares due to non-payment of calls, confiscating amounts already paid. Reissue is the subsequent sale of canceled shares.

Explanation

• Share Capital Account is debited with the called-up amount; Calls in Arrears credited; Forfeited Shares Account credited with paid amounts.
• Discount on reissue cannot exceed the amount previously forfeited on those shares.
• Remaining balance in Forfeited Shares Account after reissue is transferred to Capital Reserve.

Examples

• Forfeiting 100 shares (10 units each, 7 called, 5 paid): Share Capital Dr. 700; To Calls in Arrears 200; To Forfeited Shares 500.

Concise Takeaway

Forfeiture cancels default shares while retaining paid funds; reissue places them back into circulation safely.

Definition

Shares issued to directors/employees for intellectual property/know-how (Sweat Equity) or to vendors for purchasing non-cash assets like land and machinery (Consideration other than Cash).

Explanation

• Asset purchase entry: Asset Account Dr. To Vendor Account, followed by Vendor Account Dr. To Share Capital Account.
• Sweat equity can only be issued to directors or permanent employees.

Examples

• Buying machinery worth 50,000 units by issuing 5,000 shares of 10 units each.

Modern Tools

Equity management software like Pulley or Shareworks helps manage vesting schedules and non-cash issuances.

Concise Takeaway

Companies can acquire vital non-cash assets and reward specialized employee expertise without expending cash liquidity.

Problem 1 (Issue at Par and Calls)

Beta Ltd. invited applications for 10,000 shares of 10 units each (3 Application, 4 Allotment, 3 First & Final Call). All money was received.

Solution:
1. Bank A/c Dr. 30,000 To Share Application A/c 30,000
2. Share Application A/c Dr. 30,000 To Share Capital A/c 30,000
3. Share Allotment A/c Dr. 40,000 To Share Capital A/c 40,000
4. Bank A/c Dr. 40,000 To Share Allotment A/c 40,000
5. Share First & Final Call A/c Dr. 30,000 To Share Capital A/c 30,000
6. Bank A/c Dr. 30,000 To Share First & Final Call A/c 30,000
        

Problem 2 (Forfeiture and Reissue)

Omega Ltd. forfeited 500 shares (10 units each, 8 called-up) for non-payment of 3 units first call (5 units paid). Reissued at 7 units fully paid.

Solution:
1. Share Capital A/c Dr. 4,000 (500 x 8)
   To Calls in Arrears A/c 1,500 (500 x 3)
   To Forfeited Shares A/c 2,500 (500 x 5)
2. Bank A/c Dr. 3,500 (500 x 7)
   Forfeited Shares A/c Dr. 500 (Discount 1 x 500)
   To Share Capital A/c 4,000
3. Forfeited Shares A/c Dr. 2,000 (2,500 - 500)
   To Capital Reserve A/c 2,000
        

• Net Amount Received = Total Shares Subscribed × Installment Value
• Securities Premium = Issue Price - Face Value
• Calls in Arrears = Called-up Capital - Paid-up Capital
• Gain on Forfeiture to Capital Reserve = Total Forfeited Amount Credited - Discount Allowed on Reissue
• Purchase Consideration = Total Value of Assets Acquired - Liabilities Taken Over

GreenTech Innovations Restructuring Case

GreenTech issued 500,000 equity shares (10 units par) at par (3 App, 4 Allotment, 3 Call). Received 600,000 applications (pro-rata allotment, excess 100,000 refunded). Mr. John defaulted on 5,000 shares (allotment & call). Mrs. Smith paid calls in advance on 2,000 shares. Machinery worth 300,000 acquired by issuing 30,000 shares to SolarMech. Mr. John's shares (full 10 called) forfeited and reissued at 8 units fully paid. Also issued 10,000 sweat equity shares for R&D.

Takeaway: Demonstrates real-world synergy of pro-rata refunds, defaults, advances, asset acquisition, forfeiture, reissue, and sweat equity.

1. What is the maximum limit of capital a company is authorized to raise by its Memorandum of Association called?
   A) Issued Capital
   B) Subscribed Capital
   C) Authorized Capital
   D) Paid-up Capital
   Answer: C
   Explanation: Authorized capital is the maximum nominal amount authorized by constitutional documents.


2. When shares are issued at a price higher than the face value, the excess amount is credited to:
   A) General Reserve
   B) Securities Premium Reserve Account
   C) Capital Redemption Reserve
   D) Profit and Loss Account
   Answer: B
   Explanation: Excess over face value goes to Securities Premium Reserve.


3. Calls in arrears are shown in the balance sheet by way of:
   A) Addition to Share Capital
   B) Deduction from Called-up Capital
   C) Current Asset
   D) Long-term Liability
   Answer: B
   Explanation: Unpaid calls are deducted from called-up share capital.


4. Calls in advance is treated in accounting as a:
   A) Share Capital item
   B) Current Liability
   C) Fictitious Asset
   D) Capital Reserve
   Answer: B
   Explanation: Advance payments create a legal obligation, categorized as a current liability.


5. The balance of the Forfeited Shares Account after the reissue of all forfeited shares is transferred to:
   A) General Reserve
   B) Capital Reserve
   C) Securities Premium
   D) Statement of Profit and Loss
   Answer: B
   Explanation: Profit on reissue and forfeiture is a capital profit transferred to Capital Reserve.


6. Under modern company law, shares can be issued at a discount:
   A) To the general public anytime
   B) Only as sweat equity shares
   C) To institutional investors during IPOs
   D) Never under any circumstance
   Answer: B
   Explanation: Ordinary share discounts are barred, but sweat equity is permitted.


7. If a share of 10 units is issued at 12 units, the journal entry for the premium is recorded during:
   A) Application or Allotment
   B) Forfeiture
   C) Final Call only
   D) Surrender of shares
   Answer: A
   Explanation: Premium is normally called and recorded with application or allotment.


8. When machinery is purchased by issuing shares, the account credited during the second stage of entry is:
   A) Bank Account
   B) Machinery Account
   C) Share Capital Account
   D) Vendor Account
   Answer: C
   Explanation: Vendor account is debited and Share Capital Account is credited upon issuance.


9. What is the discount on reissue of forfeited shares limited to?
   A) Total face value of shares
   B) Amount previously credited to Forfeited Shares Account on those shares
   C) Authorized capital limit
   D) Zero
   Answer: B
   Explanation: Reissue discount cannot exceed the amount already forfeited on those specific shares.


10. Which category of capital represents the portion of subscribed capital that has actually been demanded from shareholders?
    A) Authorized Capital
    B) Reserve Capital
    C) Called-up Capital
    D) Issued Capital
    Answer: C
    Explanation: Called-up capital is the exact portion demanded by the company.

1. Q: Define Share Capital and list its main categories.
   Answer: Share capital is the total monetary value of funds raised through shares. Main categories: Authorized, Issued, Subscribed, Called-up, Paid-up, and Reserve Capital.


2. Q: Distinguish between Calls in Arrears and Calls in Advance.
   Answer: Arrears are unpaid calls due from defaulting shareholders (deducted from capital); Advance represents money paid before formal demand (current liability).


3. Q: Explain the accounting treatment of Securities Premium Reserve.
   Answer: Credited when shares are issued above face value. Shown under Reserves and Surplus and used strictly for statutory purposes like bonus share issuance.


4. Q: What conditions govern the reissue of forfeited shares?
   Answer: Can be reissued at par, premium, or discount, provided the discount does not exceed the amount previously forfeited on those shares.


5. Q: How do you record the purchase of a fixed asset when payment is made by issuing shares?
   Answer: 1) Debit Asset A/c, Credit Vendor A/c. 2) Debit Vendor A/c, Credit Share Capital A/c (and Securities Premium if applicable).


6. Q: What are Sweat Equity Shares?
   Answer: Equity shares issued to directors or permanent employees at a discount/non-cash consideration for intellectual property or know-how.


7. Q: Why is Reserve Capital created?
   Answer: It is a portion of uncalled capital resolved not to be called except upon winding up, safeguarding creditors.


8. Q: Explain pro-rata allotment with an example.
   Answer: Proportional allocation during over-subscription. E.g., receiving 150,000 applications for 100,000 shares results in 2 shares allotted for every 3 applied.


9. Q: What is the difference between an issue of shares at par and an issue at premium?
   Answer: Par means selling at exact face value; Premium means selling above face value due to high market demand and reputation.


10. Q: What happens to the balance of the Forfeited Shares Account when shares are reissued?
    Answer: Reissue discount is adjusted against it, and any remaining credit balance is transferred to the Capital Reserve Account.

• Capital Categories (A-I-S-C-P): Authorized, Issued, Subscribed, Called-up, Paid-up.
• Installment Sequence (A-A-C): Application, Allotment, Calls.
• Arrears vs. Advance: Arrears = Unpaid (Deduction); Advance = Prepaid (Liability).

Mnemonics: "Always Invest Smartly, Calculate Profits" (A-I-S-C-P) and "All Apples Crunch" (Application, Allotment, Calls).