ACCOUNTING FOR ISSUNCE

OF SHARES
Lecture 3
SHARE CAPITAL
• Share capital, also known as equity financing. s the money invested in
a company by its shareholders.
• Share capital is a long-term source of finance.
Types Of Share Capital
• Share capital of a company can be divided into the following different
categories:
• 1. Authorized, registered, maximum or normal capital
The maximum amount of capital, which a company is authorized to
raise from the public by the issue of shares, is known as authorized
capital. It is a capital with which a company is registered, therefore it is
also known as registered capital.
2.Issued Capital

Generally, a company does not issue its authorized capital to the public
for subscription, but issues a part of it. So, issued capital is a part of
authorized capital, which is offered to the public for subscription,
including shares offered to the vendor for consideration other than
cash.
The part of authorized capital not offered for subscription to the public
is known as 'un-issued capital'. Such capital can be offered to the public
at a later date.
3.Subscribed Capital
It can not be said that the entire issued capital will be taken up or
subscribed by the public. It may be subscribed in full or in part. The
part of issued capital, which is subscribed by the public, is known as
subscribed capital.
4.Called Up Capital
• It is that part of subscribed capital, which is called by the company to
pay on shares allotted. It is not necessary for the company to call for
the entire amount on shares subscribed for by shareholders.
• The amount, which is not called on subscribed shares, is called
uncalled capital.
5. Paid-up Capital
• It is that part of called up capital, which actually paid by the
shareholders. Therefore it is known as real capital of the company.
• Whenever a particular amount is called and a shareholder fails to pay
the amount fully or partially, it is known an unpaid calls or calls in
arrears.
Paid-up Capital = Called up capital - calls in arrears
6. Reserve Capital
• It is that part of uncalled capital which has been reserved by the
company by passing a special resolution to be called only in the event
of its liquidation. This capital can not be called up during the
existence of the company.It would be available only in the event of
liquidation as an additional security to the creditors of the company
TERMS OF ISSUE
Issue of Shares
• A company can issue shares when wants to raise fund. Shares are issued when a
company invites for subscription for shares. The terms of issue of shares are mentioned
in the prospectus of the company.
• Shares can be issued at par or at premium or at discount.

• Issue of shares at ‘par’.

• If shares are offered to the public at face value, it is known as Issue of shares at ‘par’.
• When shares are issued at the face value means when the issue price is equal to the face
value then it is called as the issue of shares at par.
• For example, issue of shares of the fair value of Rs.10,000/- at Rs.10,000/- only. Shares
are said to be issued at premium if they are issued at a price higher than face value
Issue of shares at premium
• Shares are said to be issued at premium if they are issued at a price
higher than face value. When shares are issued at a price higher than
the face value then it is called as the issue of shares at premium. The
excess of issue price over the face value is the amount of premium.
The premium on issue of shares is treated as revenue profits.
• For example, if the face value of a share is Rs.10,000/- and issued at
say Rs.12,000/-, the shares are said to be issued at a premium of
Rs.2,000/- per share.
Issue of shares at discount
• When the shares are issued at a price lower than the face value, they are
said to be issued at discount.
• Shares are said to be issued at discount if they are issued for a price lower
than the face value.
• For example if the face value of a share is Rs.10,000/- and issued
atRs9000/- a share, then the share is issued at a discount of Rs1,000/-, in
which case the shareholders have to pay only Rs.9,000/- per share.

• Any company could not offer the shares at discount when

• It is a new company
• It is a new class of shares even though of an old company
• The discount on issue of shares is treated as a loss of capital nature.
Journal entry of discount on issue of shares

When we receive allotment by giving discount on issue of share

1 Amount due of allotment
Share Allotment Account Debit xxxx( face value of allotment –
discount)
Discount on issue of share account Dr xxxx( amount of discount)
To Share capital account Cr
2. When allotment money actually received
Bank account Dr xxx( face value of allotment –discount)
To share allotment account
Example:

Let the face value of a share is Rs. 100.

• In this case, when share is issued at Rs. 100 then it is called that share
is issued at par.
• Let the share is issued at Rs. 120 then it is called that share is issued
at a premium of Rs 20 (Rs 120 –Rs. 100)
• Let the share is issued at Rs. 90 then it is called that share is issued at
the discount of Rs 10 (Rs 100 –Rs. 90)
Methods of Payment
• Payment in Full
• Payable by instalments
• Payment in full
• The full amount of the issue price of the shares and debentures should be
paid to the company on application whether or not the applicants will allot
the shares and debentures.
• Payable by instalments
• When shares are issued and payable in installments then first installment is
called as “application money”. Second installment is called as “allotment
money “. Third installment is called as “first call money” and last
installment is called as “Final call Money”
Under the companies ordinance only fully paid shares can be issued i.e
full value ofshare is paid on application
(i) Acoounting entries(for cash)

The important steps in the procedure of share issue are :

• 1. Applications The company first issues the prospectus inviting the

public to subscribe for its shares. Prospectus is an invitation to the public
that a new company has come into existence and it needs funds for doing
business. It contains complete information about the company and the
manner in which the money is to be collected from the prospective
investors.
• On reading prospectus, the public applies for shares in the company In a
prescribed form.The applicant is required to remit full value of the shares
applied with the application.The amount of share application money must
be deposited and kept in a separate Bank Account in a schedule bank.
journal enrtry made for receiving the share
application money is

• Bank account
• To share application account
2.ALLOTMENT

• Company can proceed with allotment of shares only after complying

with the following requirements.
• The amount fixed as minimum subscription must have been subscribed for.
• The amount of minimum subscription of share capital which is stated in the prospectus must be
raised by the issue of share capital.it is to be exclusive of any amount payable otherwise than in
cash.
• All money received from applicants for shres should be kept deposited in a schedule bank till the
company obtain the certificate to commence business.
• The amount payable on application on each share shall be the full nominal amount of the share.
REFUND OF SHARES
• Sometimes , the directors are not able to allot any share to some of
the applicants . In such a situation , money received from the
applicants whose applications are not accepted is refunded to them.
• The journal entry for this is as under
• Share application account Dr
• To bank account Cr
• (Being refund of money)
 Over-subscription and Under-subscription of
shares
Under-subscription of shares
• Sometimes the application for shares is received for less than the
number of shares issued. This is called under-subscription. In such a
case, the allotment will be equal to the number of shares subscribed
for and not to the shares issued.
• • For example,
• if 2,500,000 equity shares of Rs 1,000 each are issued, but only
2,000,000 equity shares are subscribed for, then the company will
allot only 2,000,000 equity shares (and not 2,500,000 equity shares
issued.)
Over-subscription
• Sometimes the applications received may exceed the number of
shares issued to the public. This situation is called over-subscription.

• In such a case, Directors will have to refuse allotment to some

applicants. For this purpose, any of the following methods can be
used:
• 1) Totally rejecting the applications for excess number of shares, e.g.,
shares issued are 20,000 but applications are received for 22,000
shares. Therefore, the excess number, 2,000, can be totally rejected
and applicants for 20,000 shares only are allotted the shares.
(ii)Issue of shares for consideration other
than cash
• Normally shares are issued for cash.But sometimes shares can be
issued for consideration other than cash.
• For instance shares may be issued to the promoters for the services
rendered by them in connection with the formation of the company
or may issued to the vendors (supplier, is an individual or company
that sells goods or service to someone) from whom the company has
purchased assets.This type of issue of shares to vendors for
consideration other than cash.
• The journal entries are
Journal entries for the issue of shares for
consideration other than cash
• a. When property is acquired
• Property or Asset A/c Dr (with cost)
• To Vendor
• b. When shares are issued in exchange for the value of property
• Vendor A/c Dr
• Discount on Issue A/c Dr (in case of discount)
• To Share Capital (face value)
• To Security Premium A/c (in case of premium)
• To Vendor Account
• (Being purchase of assets)

• (ii) Vendor Account

• To Share Capital Account
• (Being issue of shares as payment of price)
• When shares are issued to promoters in return for the services
rendered by them in connection with the formation of the company
the necessary entry would be
• Goodwill account
• To share capital account
 Issue of Shares- Journal Entries
• 1. When application money is received:
• Dr. Bank A/c xxx
• Cr share Application A/c xxx
• (Being application money received)
• 2. On allotment of shares:
• a) The application money on allotted shares is transferred from share application account to share capital A/c with the following
entry.
• Dr. Share Application A/c xxx
• Cr. Share Capital A/c xxx
• (Being application money transferred to share capital A/c) •
• b) If any applications are totally rejected the application money should be refunded to the applicants. The following entry is
passed for the refund.
• Dr. Share Application A/c xxx
• Cr. To Bank A/c xxx
• (Being Application money refunded)
• 3. For the allotment money due on the shares:
• Dr. Share allotment A/c xxx
• Cr. Share Capital A/c xxx
• : 4. When allotment money is received:
• Dr. Bank A/c xxx
• Cr. Share Allotment A/c xxx
• • (Being the allotment money received)
• • It should be noted that the above entry should be passed with the actual
amount received towards allotment money.
• 5. When the company makes the first call:
• Dr. Share First Call A/c xxx
• Cr. Share Capital A/c xxx
• (Being the first call money due)
• This entry should be passed with the amount called up on first call.
• 6. When first call money is received
• : Dr. Bank A/c xxx
• Cr. Share first call A/c xxx
• (Being first call received)
• • This entry is passed with the actual amount received on first call. •
Similar entries are made for every call. The last call is called the final
call. If there is only one call, it is known as first and final call.
Calls in advance and calls in arrears
• Calls in advance refer to the amount paid by shareholders in excess of
the amount due from them. A company may accept calls in advance
only if authorized by the Articles. Such amount should be credited to
a separate account called “Calls in Advance” account and not to share
capital account.
• If the calls are not made before the Statement of Financial Position
date, the amount in calls in advance account is added to paid up
capital in the Statement of Financial Position.
For recording ‘Calls-in-Advance’, the following
journal entry is recorded :
• Bank A/c Dr.
To Call-in-Advance A/c Cr
• When calls become actually due, calls -in-advance account is adjusted
at the time of the call. For this the following journal entry is recorded:
Calls-in-Advance A/c Dr.
• [Call amount due]
Calls in Arrears
• Calls in arrears refer to the amount called by the company which is
not paid by the shareholders before the due date fixed for payment.
Such amount is transferred to an account called calls in arrears account
from the calls account.
• The amount of calls in arrears is shown as deduction from the paid up
capital in the Statement of Financial Position.
• The balance in Calls -in-Advance account is shown as a separate item
on the liabilities side of the company’s balance sheet under the
heading ‘Share Capital’ but is not added to the amount of paid-up
capital.
• The accounting treatment of interest on Calls-in-Advance is as
follows:
• (1)Interest on call in advance a/c Dr
• To shareholder’s a/c Cr
• (Amount of interest due for payment)
• Shareholder’s a/c Dr
• To bank a/c Cr
• (Interest paid on calls-in-advance)
The Journal entries for calls-in-arrears are as
follows:
Shareholders’ A/c Dr.
• To Interest on Calls-in-arrears A/c Cr
• (i) For interest receivable on calls-in-arrears
Illustration 1:
Bona Ltd. issued 15,000 equity shares of Rs.1000/- each at a premium
of Rs.200/- per share. The amounts are payable as under. • On
application Rs.400: on allotment Rs.400/- On First call Rs. 200: on Final
call Rs.200/- • Public applied for 12,000 shares. All money due was
collected except first call money on 200 shares and final call money on
300 shares.
Pass necessary journal entries in the books of the company and
prepare the opening Statement of Financial Position
 Solution:
Bona Limited Journal
Date Particulars LF Debit (Rs.) Credit (Rs.)
• Bank A/c 4,800,000
Equity Share Application A/c 4,800,000
(Being application money received on 12,000 shares @Rs.400 per share)
• Equity Share Application A/c 4,800,000
Equity share capital A/c 4,800,000
(Being application money transferred to share capital A/c)
• Equity Share Allotment A/c 4,800,000
Equity share capital A/c 2,400,000
Securities premium A/c 2,400,000
(Being allotment money due on 12,000 shares @ Rs.400 per share)
Solution contd:
• • Dr.Bank A/c 4,800,000
• Cr.Equity Share Allotment A/c 4,800,000
• (Being allotment money received)
• • Dr.Equity Share First Call A/c 2,400,000
• Cr.Equity Share Capital A/c 2,400,000
(Being First call money due @ Rs.200/- per shares)
• • Dr.Bank A/c 2,360,000
• Cr.Equity Share First call A/c 2,360,000
(Being First call money received on 11,800 shares)
Solution contd:
• • Dr.Equity Share Final Call A/c 2,400,000
• Cr. Equity Share Capital A/c 2,400,000
(Being Final call due on 12,000 Shares @ Rs.200 per share)
• • Dr.Bank A/c 2,340,000
• Cr. Equity Share Final Call A/c 2,340,000
(Being Final call money received on 11,700 shares)
• • Dr.Call in arrears A/c 100,000
• Cr.Equity Share First call A/c 40,000
• Cr. Equity Share Final call A/c 60,000
(Being First call and Final call arrears transferred to calls in arrears
Statement of Financial Position of Bona Ltd.
as on 31-12-2008
Liabilities Amount Assets Amount
Rs. Rs.
Authorised Capital
• 15000 Equity Shares of Rs.1000/- each ..... 15,000,000
• Issued Capital
• 15,000 equity shares •Rs.1,000/- each. 15,000,000
• Subscribed capital
• 12,000 equity shares of • Rs.1,000/- each 12,000,000
• Called up and paid-up Capital: Current Assets
• 12,000 Equity Shares 12,000,000 Cash at Bank 14,300,000
• of TZS.1,000/- each fully paid
• Less: Calls in arrears 100,000 11,900,000
• Reserves and Surplus
• Securities premium 2,400,000
• ------------------------------------------------------------------------------------------------------------ •
14,300,000 14,300,000
FORFEITED SHARES
• A forfeited share is a share in a company that the owner loses (forfeits) by failing to meet
the purchase requirements.
Share forfeiture is the process by which the directors of a company cancel the power of
a shareholder if he does not pay his call money when the company demands for it. The
company will give 14 days' notice; after 14 days if the shareholder does not pay then
company will forfeit his shares and strike his name from the register of shareholders. The
company will not repay the funds received from the shareholder. In order to do a share
forfeiture the Articles of Association of the company should contain a provision for that.

• Suppose Mr. A buys 100 shares of a company but for the time being the company asks
him to pay only 50% of that amount. The company makes a deal with Mr. A that
whenever needed, the rest of the money will be asked for. Some months later when the
company asks for the remaining 50% amount, Mr. A says that he is incapable of paying.
The company gives him some more time to pay but he still can't pay. The company seizes
his shares and he no longer is a shareholder of the company. He loses the 50% he had
already paid. This seizure of shares is called share forfeiture.
Forfeituer of shares issued at par
In this case share capital a/c will be debited with the called up value of shares
forfeited.
Allotment or calls a/c will be credited with the amount due but not paid by the
shareholders. (Alternatively, Calls-in-Arrears Account can be credited for all
amount due, if it was transferred to Calls-in Arrears Account).
Forfeited Shares Account or Shares Forfeiture
Account will be credited with the amount already received in respect of those
shares.
Share Capital Account Dr. (No of shares X called up per value of share)
To Forfeited shares account.Cr (Amount already received on forfeited
shares)
To Share Allotment Account (If amount due but not paid)
Forfeiture of share issued at par:
• Share capital a/c dr (a)
• To share forfeiture a/c(b)
• To share allotment a/c(c)
• To share calls a/c(d)
•
Forfeiture of shares which were issued at a
Discount
• In this case also Share Capital Account will be debited with the called-
up value of shares forfeited, Allotment or Calls Account will be
credited with the amount due but not paid by the shareholder(s).
(Alternatively, Calls-in-Arrears Account can be credited) . Forfeited
Shares Account will be credited with the amount already received in
respect of those shares.
• When shares are issued at a discount, the Discount Account is
debited. Therefore, at the time of forfeiture of such share, Discount
Account will be credited to cancel it.
ENTRY
• Share capital a/c DR(No of shares xcalled up value per
share)
• To share allotment a/c Cr(If amount due but not paid)
• To share first call a/c Cr(If amount due but not paid)
• To share final call a/c Cr(If amount due but not paid)
• To Forfeited shares a/c (Amount received on forfeited
shares)
• To Discount on issue of shares a/c (No. of sharesx discount per
share)
Forfeiture of shares which were issued at a
premium
• In this case, Share Capital Account will be debited with the called-up
value of shares forfeited. If the premium on such shares has not been
paid by the shareholder, the Securities Premium Account will be
debited to cancel it (if it was credited earlier). Allotment, Calls and
Forfeited Accounts will be credited in the usual manner.
• NOTE
• If the premium has already received by the company, it cannot be
cancelled even if the shares are forfeited in the future
Journal For forfeiture of shares
• Share Capital A/c Dr (with the amount called up, ie amount
paid +unpaid)
• Security Premium A/c Dr (with the unpaid amount of premium)
• To Share Allotment (with the unpaid amount on allotment)
• To Share Call (with the unpaid amount on call)
• To Discount on Issue of Shares A/c (if shares are issued at discount)
• To Forfeited Shares A/c (with the amount paid excluding premium)
Journal For re issue of forfeited shares
• Bank A/c Dr (amount received on
re-issue)
• Discount on Issue of Shares A/c Dr (with the amount of original
discount if the Shares originally were issued at discount)
• Forfeited Shares A/c Dr (with the discount or
loss on re-issue)
• To Share Capital A/c (with the amount
credited as paid up)
• To Security Premium A/c (with the amount of
premium on re-issue)
• If all forfeited shares have been re-issued, the credit balance left in
the Forfeited Shares A/c being a capital profit should be transferred to
Capital Reserve A/c by passing the following journal entry:
• Forfeited Shares A/c Dr
• To capital reserve A/c
• If only a part of the forfeited shares have been re-issued, only the
profit on shares which have been re-issued is transferred to Capital
Reserve A/c