Chapter 3

Issue of Equity Shares

Syllabus:
• Provisions relating to issue of shares at par, at premium.
• Accounting for issue of shares, lid! subscription, Under subscription. Over subscription.
Call in Advance/ Calls in Arrears, Forfeiture and Re issue of forfeited shares.
• Issue of shares in consideration other than cash.
• Accounting Entries.
Capital is essential for trading concern A company collects capital by inviting the public Al buy its
share through a document known as prospectus. The capital is usually divided into different units
of fixed amount. These units are called 'shares'
A share of a company is one of the units into which the capital of a company is divided. So, if the
capital of a company is 2 lakhs, and such a capital is divided into 2000 units of Rs. 100 each. Then
one unit of amount 100 is a share of the company.
Thus, a share is a basic ownership of the company. And a person who holds such shares and is thus
a member of the company is known as shareholder.
The share which can be issued by a company are of two types
3.1 Preference Shares and Equity shares:
Preference Shares:
A Preference share is one which carries two exclusive preferential rights over the other types of
shares (i.e. equity shares)
a) A preferential right as to the payment of dividend during the lifetime of the company and
b) A preferential right as to the return of capital when the company goes into liquidation
Equity Shares:
Equity Share is a share is simply not a preference share. So, shares do not enjoy any preferential
rights are thus equity shares.
The dividend gives to equity shareholders is not fixed. The rate of dividend may vary from year to
year, depends upon the profit of company.
Issue of Shares:
When a company wishes to issue shares to the public, there is a procedure and rules that it must
follow as prescribed by the companies Act 2013 and SEBI guidelines in this regard
Before the issue of shares. a public company issues a document called prospectus inviting the
public to submit applications to take up the shares of the company.
When the Prospectus is issued. prospective investors can noun apply for shares. If the applications
received are adequate. the Board of Directors Proceed to allot shares on application received. It the
company does not receive minimum subscription 1 at least 90'. of the issued capital) In such a case
the application money received thus far must be returned within the prescribed time limit.
3.2 Subscription of Shares:
Accounting for issue of shares depends upon the type of subscription. Whenever a company
decides to issue shares to public, it invites applications for subscription by issuing a prospectus k
is not necessary that company receives applications for the number of shares issued by it. There
are three possibilities
1. Full subscription: Issue is fully subscribed if the number of shares offered for public
subscription and the number of shares actually subscribed are same.
 2. Under Subscription: It means the applications for shares received are less than the number
of shares issued. For instance. Company issued 10.000 shares issued to public and company
received application for 9500 shares. This situation called under subscription. In such cases,
the allotment may be done to the number of shares subscribed for i.e. 9500 shares. But if
the company fails to receive the minimum subscription. shares cannot be allotted. And all
application money will be returned to applicant.
3. Over Subscription: Sometimes company receives applications for larger number of shares
than offered for subscription. This situation is termed as ova-subscription However
allotment can be made only to the number of shares that are issued. The company cannot
allot more shares than the issued, even if there is demand for the shares.
If an issue is over subscribed
i) Some applications may be rejected and application money refunded.
A company issued 10,000 shares and received applications for 12000 shares. Therefore, the
company reject excess number of applications of 2000 shares and by doing so application money
on 2000 shares also be returned to the applicant.
ii) Allotment of shares on pro-rate basis
In case of Pro-rate allotment each applicant is allotted the share in the proportion of shares applied
for the shares issued. for example. if 20,000 shares are issued and share applied for are 40.000
shares then the ratio will be 2 shares applied for one share issued, and in this ratio, shares will be
allotted. i.e. if 200 shares are applied for. 100 shares will be allotted.
When Pro-rate allotment is made. application money received will be for more number of shares
nun allotted this excess application money on partially accepted application is not refunded to
applicant but it is adjusted towards the amount due on allotment and calls
iii) sometimes the directors may reject some application, accept some application in full and allot
pro-rata the remaining applicants.
Overview of the procedure for raising fund through equity

Procedure for raising funds through equity

Issue of prospectus inviting applications for shares from the public

Full Subscription Under Subscription Over Subscription

Minimum Subscription Minimum Subscription Pro-Rata allotment

Received not Received made by directors

All application money returned Allotment money

Direct make due and received
allotment

Call made and call

money received
 Account entries on Issue of shares for cash
Issue of shares at par:
1 On receipt of application money.
Bank A/c Dr
To share Application A/c 2.
2 On allotment of shares
(i) Share Application A/c Dr
To share capital A/c
with application money on the actual number of shares allotted
(ii) Share Application A/c Dr
To Bank A/c
(Refund of application money on rejected applications)
(iii) Share Allotment A/c Dr
To share Capital
(Allotment money due)
(iv) Share Application A/c Dr
To share allotment A/c
(Excess application money transferred to share allotment A/c in case of partial
allotment.)
(v) Bank A/c Dr
To share Allotment A/c
(with actual amount received on allotment)
3 On making calls -
Share call A/c Dr
To share capital
(With amount due on call - first, second or final call as the case may be)
Receipt of call money
Bank A/c Dr.
To share call A/c
(with actual amount received on first, second or final call as the case may be)
3.3. Issue of shares at Discount:
If the issue price of a share is less than its face value, it is called as shares issued at a discount.
According to section 53 of the companies Act, 2013 a company cannot issue shares at discount
except in case of issue of sweat equity shares (issued to employees and directors)
Issue of shares at Premium:
When issue price of a share is more than its face value, it is known shares issued at premium.
For example, when a share of the face value of Rs. 100 is issued at 110, it is said to have been
issued at a premium of 10 per cent.
As per the provision of companies Act, the premium amount is credited to a separate account
called 'securities Premium Account' According to section 52 of the Companies Act 2013.
securities Premium Account may be used by the Company.
a) Towards issue of bonus shares.
b) To write off preliminary expenses.
c) To write of expenses of commission paid or discount allowed on shares or debentures.
d) Providing for the premium payable on the redemption of redeemable preference shares or
debentures.
e) For the purchase of own shares or other securities.
When shares are issued at premium, the journal entries use as follows-
a) Premium amount called with application money
(i) Bank A/c Dr (Total application money + premium.)
To share Application A/c
 (ii) Share Application A/c Dr. (Total amount FV + Premium)
To securities Premium (Amount of Premium)
to share capital. (FV of shares)
b) Premium Amount called with Allotment money)
(i) Share Allotment A/c Dr. (Allotment & Premium amount
To share capital (face Value)
To securities Premium A/c (Premium amount)
(ii) Bank Account Dr
To share Allotment A/c.
Calls in Arrears:
Sometimes shareholders fail to pay the amount due on allotment or calls. The total unpaid amount
is known as calls in Arrears or unpaid calls. Such amount represent uncollected amount of capital
from the shareholders, Hence it is shown by way of deductions from called up capital in Balance
sheet. For recording calls in arrears the following journal entry is passed.
Bank A/c Dr (Amount received)
Calls in Arrears A/c Dr (uncollected amount)
To Share Allotment or share calls A/c (Total amount due)
Where the outstanding call money is received, the following entry will be passed -
Bank A/c Dr
To calls in Arrears A/c
Calls In Advance:
Some of the shareholders pay the call money in advance even if the call is not made. This amount
is credited to in calls in advance Account
The following entry is recorded
Bank A/c Dr. (call amount received in advance)
To calls in Advance A/c
When calls become actually due, calls in advance account is adjusted at the time of call.
For this, following entry is recorded
Calls in Advance A/c Dr (call amount received in advance)
Bank A/c Dr (remaining call money received)
To particular call A/c (call money due)
Interest on calls In Arrears nd calls in Advance:
Interest on calls in Arrears is recoverable and interest on calls in advance is payable. Table F
prescribes 10% and 12% p.a. as the maximum rates of interest for calls in Arrears and calls in
advance.
Journal entries for interest receivable on calls in Arrears
Shareholders A/c Dr
To Interest on calls in Arrears A/c
(Being interest on calls in arrears at the rate of ------% made due)
(i) for receipt of interest
Bank A/c Dr
To shareholders A/c
(Being interest money received)
Journal entries for interest on calls in advance is
Interest on calls in Advance A/c Dr
To shareholders A/c
(Being interest on call in advance due)
(ii) Shareholders A/c Dr.
To Bank A/c
(Being interest paid on calls in advance)
3.4 Forfeiture of shares:
The terms 'Forfeit' actually means taking away of property on breach of a condition. I f a
shareholder does not pay the allotment and/or call money on the due dates, the company in
accordance with the provisions of the articles of association forfeit the shares held by shareholder
Forfeiture of share is the action taken by a company to cancel the shares. When shares are forfeited.
the amount already paid by the shareholder is not refunded to him.
Accounting Entries -
Shares can be issued at par or at premium. Accounting entries for forfeiture will van according
to situations
A. Forfeiture of shares issued at par
Share Capital A/c Dr (with called up amount)
To Forfeited shares A/c (amount already received on forfeited shares)
To share allotment A/c (amount due but not paid)
To share call A/c
Alternatively, if unpaid amount transfers to calls in Arrears A/c the entry will be:
Share Capital A/c Dr (Called up amount)
To calls in Arrears A/c (Total amount due)
To forfeited shares A/c (Amount received)
Forfeiture of shares which are issued Premium-
A. If premium not received
Share Capital Nc Dr (called up value)
Securities premium A/c Dr (Premium not received)
To share Allotment (Amount due but not received)
if the premium has already received by the company, it cannot be cancelled even if the
shares are forfeited in future
Share capital A/c Dr (called up vales!)
To Share Allotment A/c (Amount due hut not paid)
To first call A/c
To Final call A/c
To forfeited shares A/c (Amount received on forfeited shares)
Re-issue of forfeited shares:
The forfeited shares can he reissued by the company. These shares can be reissued at any price
so long .as to amount received (From the original allottee and the second purchaser) for those
shares is not less than the amount in arrear and those shares for example If a share of Ill. 10 o
which Rs. 4 has already been paid, is forfeited and reissued as fully paid a minimum of Rs. 6 must
be collected. The entry on the reissue of forfeited share is
A. Bank A/c Dr (Actual amount received)
Forfeited shares A/c Dr (Loss on reissue)
To share capital A/c
(Being the re-issue of shares @ Rs. each
as per Board resolution no---- dated )
B. Forfeited shares A/c--- Dr
To capital Reserve A/c
(Being the profit on re-issue <balance of forfeited shares A/c >
transferred to capital reset v c)
Points for consideration:
When the shares are re-issued at loss, such loss is to be debited to "forfeited shares Account."
Loss on re-issue should not exceed the forfeited amount
The balance of forfeited share Account (i.e. Capital profit) transferred to capital Rescn When
only a portion of the forfeited shares are re-issued, then the profit made on re-Issu-.: of such
portion of shares only must be transferred to capital Reserve.
If the shares are re-issued at price which is more than the face value of the shares, ex,::.ss
amount will be credited to securities premium Account.
If the re-issued amount and forfeited amount (taken toget!ler) exceed; the face value of shares
re-issued, it is not necessary to transfer such amount to securities premium Account.
Illustration - 1.
A Ltd issued 20,000 shares of 100 each l'` February 2019. The amount payable these shares
was as under
Rs. 25 on Application
Rs. 20 on Application
Rs. 35 on First call and
Rs. 20 on final call
By 15'5 February, applications received for all the shares issued. All the shares were allotted
on 1" March and allotment money due received by 15th March. First call was made on 1' June and
the amount due was received in full by 15th June. Final call was made on 1' August and call money
received in full with the exception of 2000 shares by 16th August. Make Journal Entries
Illustration - 2
B Ltd invited application for 25000 Equity shares of Rs. 100 which are payable as an application
Rs. 40
On allotment Rs. 20 and balance on first and final call the company received application for 30,000
shares. The directors accepted application for 25000 shares and rejected the rest.
All shareholders have duly paid the amount called except one shareholder holding 1000 shares not
paid final call money. Pass Journal Entries.
Illustration - 3.
Moon Ltd issued 20,000 shares of Rs. 1 00 payable Rs. 30 on application Rs. 20 on allotment and
balance on first and final call. The company received application for 32,000 shares. Pro-rata
allotment was made on application for 25000 shares.
One applicant Mr. Careless who was allotted 100 shares did not pay the allotment and final .d1
money. Pass Journal Entries
Illustration - 4.
On 1st January. 2019 Bajaj Ltd received application 25000 Equity share of Its. 100 each to he
issued at a premium of 25 percent payable as
On application Rs. 25
On Allotment Rs. 55 (including premium)
Balance amount As and when required
The shares were allotted on 15 January 2019 and the allotment money duly recei% cd on 15
February. Give Journal Entries
Illustration - 5.
A company with an authorized capital Rs. 50,00,000 invited application for 2,00,000 shares of Rs.
10 each at a premium of Re.1 payable as
On Application Rs. 3
On Allotment Rs. 4 (including premium)
Or First & Final call Rs. 4.
There was over-subscription and applications received for 3,25,000 shares. Allotment of
share was made as under.
To applicant of 1,50,000 Shares 1,50,000 Shares
To applicant of 25,000 Shares Nil
To applicant of 1,50,000 Shares 50,000 Shares
Excess money paid on application was adjusted against sum due on allotment and first call.
All money due was received.
Illustration - 6. (Forfeiture of shares issued at par)
A company forfeits 1000 shares of 10 each fully called up on which shareholder has failed to pay
first call of Rs. 3 and second and final call of Rs. 3 per share. Pass Journal Entry for forfeiture.
Illustration - 7. (Forfeited shares issued at premium)
Company forfeits 1000 shares of Rs. 10 at Rs. 11 per share for non-payment of allotment & call
money.
The amount payable Rs. 3 on application Rs. 3 on allotment (including premium) and balance Rs.
5 on first and final call. Pass Journal entry.
Illustration - 8. (Forfeiture of shares issued at premium & partly called up)
Company issued 30,000 equity shares of Rs. 10 at Rs. 11 payable Rs. 2 on application Rs. 3 on
allotment (including premium) Rs. 3 on first call and balance on final call.
The shares were called up to the 1st call stage, All the share money received except from Mr. X
holding 300 shares who paid only application and Mr. Y holding 100 shares, who paid up-to
allotment. All these shares were forfeited.
Illustration 9.
Company issued 10.000 equity shares of Rs. 10 payable as follows
On application Rs. 3 at on allotment Rs. 4 and first and final call R.s. 3
Application for 12,000 shares received Company rejected excess applications and the application
money was refunded. All the shareholder paid the allotment and call money
Mr. And Who failed to pay call money on 200 shares. His shares were forfeited and re-issued at
Rs. 8 Per share fully paid.
Illustration 10.
Company offered to public for subscription 1,00,000 shares of Rs. 10 at a premium of
1 Payment was to be made as follow:
On Application Rs. 3
On Allotment Rs. 4 (Including premium)
On first and final call Rs. 4
Applications were received for all the shares offered and allotment was duly made. All
the moneys were duly received except call money on 1000 shares. Which were forfeited. Later all
the forfeited shares were re-issued as fully paid @ Rs. 9 per share Journalise all the above-
mentioned transaction.
Illustration 11.
Sony Ltd issued 6000 equity shares of Rs. 100 at a premium of 10% payable as
On Application Rs. 30
On Allotment Rs. 30 (including Premium)
On first and final call Rs. 50
Application for 9000 shares were received and company made pro-rata allotment. Excess
application money was adjusted against allotment dues. All the shareholders paid the allotent and
call money exce-i7.! Mr. Insolvent who tailed to pay call money on 80 shares. His shares were
forfeited and re-issued to Mr. Kuber at Rs. 80 Per share.
Pass Journal entries
Illustration - 12.
Fashion Ltd. issued 40,000 Equity shared of Rs. 10 each. Payable Ks. 4 on application Rs. 2 on
allotment Rs. 2 on first call and balance on find call.
All moneys upto allotment dully received, but Mr. Jay who hold 1200 shares failed to pay first
and final call and these shares were forfeited. Out of these forfeited shares, 1000 share were re
issued to a Director as fully paid u• for Rs. 9 •set share. Pass journal entries
Illustration - 13
Company offered (1.4 public subscription 5,000 Equity shares of Rs. 15 each at a premium of Rs.2
per share payable as follows:
On Application Rs. 3 Per share
On allotment Rs. 7 Pet. share (including premium)
On 1st call Rs. 4 Per share
On second & Final Rs. 3 Per share
Application were received for 8500 shares and allotment was made Pro-rata to applications for
7500 shares, Directors rejected application for 1000 shares and refunded the application money
recievected there on. Money overpaid on application by the allotted he adjusted with allotment
money.
Avinash to whom 100 shares were allotted failed to pay the allotment money and on his, failure
to pay the first call, his shares were forfeited.
Shankar to whom 150 shares were allotted failed to pay both the calls and his shares were forfeited
after the final call was made.
All forfeited shares were allotted as fully paid, to Mr. Awn at Rs. 12 per share. Pass Journal
Entries.
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