A company is a voluntary association of persons formed for carrying on a business and having a legal identity distinct from its members. Unlike a partnership, the liability of the shareholders of a company limited by shares is limited to the amount unpaid on their shares. The capital of a company is divided into small units called shares, and the owners of these shares are called shareholders.
The share capital of a company is classified into several categories. The authorised capital is the maximum amount of share capital that the company is allowed to raise, as stated in its Memorandum of Association. The issued capital is that part of the authorised capital which is issued to the public. The subscribed capital is the part of the issued capital that has been subscribed by the public, and the paid-up capital is the portion of the subscribed capital that has actually been paid by the shareholders.
Accounting for share capital involves recording the issue of shares, the allotment of shares, calls on shares, the receipt of amounts by the company, and the handling of situations such as oversubscription, calls in arrears, calls in advance, forfeiture of shares, and re-issue of forfeited shares. Companies maintain a share capital account, share allotment account, share call account, and shareholders' personal accounts to record these transactions.
The various categories of share capital are:
$$\text{Authorised Capital} \ge \text{Issued Capital} \ge \text{Subscribed Capital} \ge \text{Paid-up Capital}$$
$$\text{Paid-up Capital} = \text{Called-up Capital} - \text{Calls in Arrears}$$
Equity shares do not carry any preferential rights. The equity shareholders are the real owners of the company, share the profits in the form of dividends declared by the company, and bear the ultimate risk. They have voting rights and are paid only after all other claims are settled.
Preference shares carry preferential rights with respect to the payment of dividend at a fixed rate and the return of capital on winding up. Preference shareholders are paid before equity shareholders. Preference shares may be cumulative or non-cumulative, participating or non-participating, and redeemable or irredeemable.
Shares are generally issued in stages: application, allotment, and calls.
When shares are issued, the application money is received from the public. The journal entry is:
Bank A/c Dr.
To Share Application A/c
On allotment, the application money is transferred to the Share Capital Account.
The shares are allotted to the applicants and the allotment money is due. The journal entry is:
Share Allotment A/c Dr.
To Share Capital A/c
When the allotment money is received:
Bank A/c Dr.
To Share Allotment A/c
The remaining amount is demanded in the form of first call and final call:
Share First Call A/c Dr.
To Share Capital A/c
Bank A/c Dr.
To Share First Call A/c
When the number of applications exceeds the number of shares offered, the issue is oversubscribed. The company may either reject the excess applications and refund the money, or make a pro-rata allotment and adjust the excess application money towards the allotment and calls.
In pro-rata allotment, the excess application money is adjusted first against the allotment money, and if any surplus remains, it is adjusted against the calls or refunded.
Calls in arrears arise when a shareholder fails to pay the amount due on allotment or calls. The amount is debited to a Calls in Arrears Account (which may be shown on the asset side of the Balance Sheet or deducted from called-up capital). Calls in advance are amounts received from shareholders before the call is made; these are shown as a liability and interest at 12% per annum is payable as per the Table F provisions, unless otherwise stated.
$$\text{Interest on Calls in Advance} = \text{Amount} \times \frac{12}{100} \times \frac{\text{Months}}{12}$$
If a shareholder fails to pay the allotment or call money, the company may forfeit his shares. On forfeiture, the amount already received on the shares is transferred from the share capital account and the share is cancelled.
Share Capital A/c Dr. (called-up amount)
To Share Allotment A/c (if unpaid)
To Share Call A/c (if unpaid)
To Share Forfeiture A/c (amount received)
Forfeited shares may be re-issued at par, at a premium, or at a discount. The discount allowed on re-issue cannot exceed the credit balance in the Share Forfeiture Account relating to those shares.
$$\text{Profit on Re-issue} = \text{Forfeited Amount} - \text{Discount on Re-issue}$$
The profit on the re-issue of forfeited shares is transferred to the Capital Reserve Account.
Share capital is shown under the heading Shareholders' Funds in the Balance Sheet. The notes include authorised capital, issued, subscribed and paid-up capital, calls in arrears, and any forfeited shares.
| Type | Description |
|---|---|
| Authorised capital | Maximum capital per MOA |
| Issued capital | Capital offered to public |
| Subscribed capital | Capital taken up by public |
| Called-up capital | Amount demanded by company |
| Paid-up capital | Amount actually received |
| Calls in arrears | Called-up amount unpaid |
| Calls in advance | Amount received before call |
| Stage | Entry |
|---|---|
| Application money received | Bank A/c Dr. To Share Application A/c |
| Application transferred to capital | Share Application A/c Dr. To Share Capital A/c |
| Allotment due | Share Allotment A/c Dr. To Share Capital A/c |
| Allotment received | Bank A/c Dr. To Share Allotment A/c |
| Call due | Share Call A/c Dr. To Share Capital A/c |
| Call received | Bank A/c Dr. To Share Call A/c |
| Basis | Equity Shares | Preference Shares |
|---|---|---|
| Dividend rate | Variable | Fixed |
| Priority | Paid last | Paid first |
| Voting rights | Yes | Generally no |
| Repayment | After preference | First |
Share capital is the foundation of a company's finances, and its accounting requires a clear understanding of the various stages of the issue of shares and the categories of capital. The application, allotment and call system, combined with the handling of oversubscription, calls in arrears and advance, and the forfeiture and re-issue of shares, form the core of this chapter. Correct journal entries and proper presentation in the Balance Sheet are essential for an accurate record of the company's capital structure. These concepts also provide the background for understanding the issue and redemption of debentures and the preparation of company financial statements.