Chapter: 1
Accounting for Share Capital
Definition of Joint Stock Company
The Companies Act 1956 defines a joint stock company as “an artificial person
created by law, having separate legal entity from its owner with perpetual
succession and a common seal”.
Section 2 (20) of the Companies Act, 2013 defines a company as “ a company
incorporated under this Act or under any previous Companies Act”.
Features of Joint Stock Company
(i) Artificial person
(ii) Voluntary association
(iii) Created by law
(iv) Capital divisible into transferable shares
(iv) Capital divisible into transferable shares
(v) Limited liability
(vi) Perpetual succession
(vi) Perpetual succession
(vii) Common seal
(viii) Separate legal entity from its members
(ix) May sue or be sued
Kinds of Companies
(i) Private companies According to Section 2 (68) of the Companies
Act, 2013, it is a company with minimum paid-up share capital of ^ 1,00,000
or such higher amount as may be prescribed in the Companies Act, 2013 and
which by its Articles of Association
- (a) Restricts the right to transfer its shares, if any.
- (b) Except in one person company, limits the number of its members excluding its present and past employee members to 200; if the past or present employee acquired the shares while in employment and continue to hold them. If any share is held jointly by two or more persons, they shall be treated as a single member.
- (c) Prohibits any invitation to the public to subscribe for any securities of the company. The minimum number of members required to form a private company is two. The name of a private company ends with the words, ‘Private Limited’.
(ii) Public company As per Section 2 (7) of Companies Act, 2013,
public company is a company which
- (a) is not a private company.
- (b) has minimum capital of Rs 5 lakh or such higher paid-up capital as may be prescribed.
- (c) is a private company, which is a subsidiary of a public company. Minimum requirement of a public company is seven persons.
(iii) One person company is a company which has only one person as a
member. It is a company incorporated as a private company which has only one
member. Rule 3 of the Companies (Incorporation)
On the basis of liability of its members the companies can be classified into
the following three categories
i) Companies Limited by
Shares: These are companies in which the liability of its members is limited
to the extent of the nominal value of shares held by them. The liability of
its members is limited to the memorandum of association and the amount unpaid
on the shares.
ii) Companies Limited by
Guarantee: In this case, the liability of its members is limited to the amount
they undertake to contribute in the event of the company being wound up. Most
non-profit organisations and charitable societies follow this pattern, such
companies may or may not have a share capital.
iii) Unlimited Companies:
When there is no limit on the liability of its members, the company is called
an unlimited company. When the company’s property is not sufficient to pay off
its debts, the private property of its members can be used for the purpose.
On the basis of the number of members, companies can be divided into three
categories as follows:
i) Public Company: A
public company means a company which
(a) is not a private
company;
(b) is a company which is
not a subsidiary of a private company.
ii) Private Company: A
private company is one which by its articles:
(a) Restricts the right to
transfer its shares;
(b) A private company must
have at least 2 persons, except in case of one person company;
(c) Limits the number of
its members to 200 (excluding its employees);
iii) One Person Company
(OPC): Sec. 2 (62) of the companies Act, 2013, defines OPC as a “company which
has only one person as a member”. Rule 3 of the Companies (Incorporation)
Rules, 2014 provides that:
(a) Only a natural person
being an Indian citizen and resident in India can form one person company,
(b) It cannot carry out
non-banking financial investment activities.
(c) Its paid up share
capital is not more than Rs. 50 Lakhs
(d) Its average annual
turnover of three years does not exceed Rs. 2 Crores.
The following are the other classification of companies
Registered Companies: These companies come into existence only when they
receive a Certificate of Incorporation from the Registrar of Companies,
thereby, registering themselves under the Companies Act, 2013.
Statutory Companies: Such companies are formed by a special act passed by the
Parliament or central/state legislation. For example – National Highway
Authority of India
Holding Companies: A company which owns one or more than one company as its
sister company and, hold more than 50% of their shares, is known as a parent
or holding company For example – TATA Group
Subsidiary Companies: Such companies are owned by another company either
partially or wholly. They are also known as sister companies. For example –
Subsidiary of TATA Group
Associate Companies: These companies are influenced by other companies which
are not subsidiary companies, and, instead involve a joint venture company.
Foreign Companies: Companies which are incorporated outside India but, have an
established business in India are known as Foreign Companies. For example –
SONY
Section 8 Companies: These companies are not-for-profit companies having
charitable objectives or want to promote commerce, art, science, sports,
education, research, etc. For example – UNICEF India
Share Capital of a Company
A company usually raise their capital through the issue of shares so the
companies capital is called Share capital. The person who hold the share is
called Shareholder.
Categories of Share Capital
• Authorised Capital:
Authorised capital is the amount of share capital
which a company is authorised to issue by its Memorandum of Association. It is
also
called Nominal or Registered capital. The company cannot raise more than the
amount of capital as specified in the Memorandum of Association.
• Issued Capital: It is
that part of the authorised capital which is actually
issued to the public for subscription. The authorised capital which is not
offered for public subscription is known as ‘unissued capital’.
• Subscribed Capital: It
is that part of the issued capital which has been actually subscribed by the
public.
• Called up Capital: It is
that part of the subscribed capital which has been called up on the shares.
• Paid up Capital: It is
that portion of the called up capital which has been actually received from
the shareholders. If any of the shareholders has not paid amount on calls,
such an amount may be called as ‘calls in arrears’.
• Uncalled Capital: That
portion of the subscribed capital which has not yet been called up.
• Reserve Capital: A
company may reserve a portion of its uncalled capital to be called only in the
event of winding up of the company. Such uncalled amount is called ‘Reserve
Capital’ of the company.
Nature and Classes of Shares
Share: A share is a unit of ownership that represents an equal proportion of a
company's capital. In other words a share is a fractional part of the share
capital and forms the basis of ownership interest in a company. The persons
who contribute money through shares are called shareholders.
As per The Companies Act, a company can issue two types of shares
(1) preference shares, and
(2) equity shares (also called ordinary shares).
Preference Shares The law defines preference share capital as that part of the
share capital of a company which fulfils both the following conditions:
(i) It carries a
preferential right in respect of the dividends;
(ii) It carries
preferential right in regard to the repayment of capital.
Types of Preference share
(a) Cumulative Preference
Shares: These shares have a right to claim dividend for those years also for
which there were no profits.
(b) Non-Cumulating
Preference Shares: The holders of these shares have no claim for the arrears
of dividend.
(c) Redeemable Preference
Shares: These are preference shares which are redeemable after a particular
period.
(d) Irredeemable
Preference Shares: The shares which cannot be redeemed, unless the company is
liquidated, are known as irredeemable preference shares.
(e) Participating
Preference Shares: The holders of these shares participate in the surplus
profits of the company.
(f) Non-Participating
Preference Shares: The shares on which only a fixed rate of dividend is paid
are known as non- participating preference shares.
(g) Convertible Preference
Shares: The holders of these shares may be given a right to convert their
holdings into equity shares after a specified period.
(h) Non-Convertible
Preference Shares: The shares which cannot be converted into equity shares are
known as non- convertible preference shares.
Equity Shares
According to Section 43 of The Companies Act, 2013, an equity share is a share
which is not a preference share. In other words, shares which do not enjoy any
preferential right in the payment of dividend or repayment of capital, are
termed as equity/ordinary shares.
Issue of Shares
A share issuance requires issuing a prospectus, receiving application of
shares, allotment of shares and a call on shares. The important steps in the
procedure of share issue are :
• Issue of Prospectus: The
company first issues the prospectus to the public. Prospectus is an invitation
to the public that a new company has come into existence and it needs funds
for doing business.
• Receipt of Applications:
When prospectus is issued to the public, prospective investors intending to
subscribe the share capital of the company would make an application along
with the application money and deposit the same with a scheduled bank as
specified in the prospectus.
• Allotment of Shares: If
minimum subscription has been received, the company may proceed for the
allotment of shares after fulfilling certain other legal formalities.
Minimum subscription: This is a minimum amount that must be raised when the
shares are offered to the public during the issue of shares. This minimum
subscription is generally set by the Board of directors, but it cannot be less
than 90% of the issued capital.
Issue Price: A company can issue shares either at par or at a premium. When a
company issue shares at a price which is is exactly equal to their nominal
value is called issue of shares at par.
When the shares of a company are issued more than its nominal value is called
issue of shares at Premium. The difference between issue price and nominal
value is called Premium. It is capital profit to the company.
Accounting Treatment for issue of shares
1. On application on
shares
Bank a/c Dr.
To Share application
(Amount received on application for ...... shares @ Rs....... per share)
2. For Transfer of
Application Money to share capital Share Application A/c
Dr.
To Share Capital A/c
(Application money on ....... Shares allotted/ transferred to Share
Capital)
3. For Money Refunded on
Rejected Application Share Application A/c
Dr.
To Bank A/c
(Application money returned on rejected application for .....shares)
4. For Amount Due on
Allotment
Share Allotment A/c Dr.
To Share Capital A/c
(Money due on allotment of ....... shares @ Rs. .... per share)
5. On Receipt of Allotment
Amount
Bank A/c Dr.
To Share Application and Allotment A/c
(Money received on ........ shares @ Rs. ... per share on allotment)
6. For Call Amount Due
Share Call A/c Dr.
To Share Capital A/c
(Call money due on .......Shares @ Rs. ..... per share)
7. For Receipt of Call
Amount
Bank A/c Dr.
To Share Call A/c
(Call money received for ......... shares @ Rs.....Per shares)
Allotment of shares: Share allotment is the creation and issuing of new
shares, by a company. It implies a contract between the company and the
applicants who now become the allottees and assume the status of shareholders
or members.
Call on shares: Call on shares means the demand made by the Company on its
shareholders holding partly paid shares to pay part or full unpaid amount on
the shares. The amount on any call should not exceed 25% of the face value of
shares. There must be an interval of at least one month between the making of
two calls unless otherwise provided by the articles of association of the
company.
Calls in Arrears: When a company calls for an unpaid amount of shares it has
issued and an investor fails to pay the amount fully or partially, then it is
known as call in arrears. In simple words, it refers to the amount of
difference between called up capital and paid up capital. Journal for calls in
arrears is;
Calls in Arrears A/c Dr.
To Share First Call Account A/c
To Share Second and Final Call Account A/c (Calls in arrears brought into
account)
Calls in Advance :Sometimes shareholders pay a part or the whole of the amount
of the calls not yet made. The amount so received from the shareholders is
known as “Calls in Advance”. The amount received in advance is a liability of
the company and should be credited to ‘Call in Advance Account.”
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)
The balance in ‘Calls in Advance’ account is shown as a separate item under
the
title Equity and Liabilities in the company’s balance sheet under the head
‘current liabilities’, as sub-head ‘others current liabilities’.
Table F of the Companies Act provides for the payment of interest on calls in
advance at a rate not exceeding 12% per annum.
The accounting treatment of interest on Calls in Advance is as follows:
(a) For Interest due
Interest on Calls in Advance A/c
Dr.
To Sundry Shareholder’s A/c (Interest paid on Calls in Advance)
(b) For Interest Paid
Dr.
Sundry Shareholder’s A/c To Bank A/c
(Interest paid on Calls in Advance)
Over Subscription
When a company receives applications for shares more than the number of shares
it has offered to the public, it is known as over-subscription of shares. In
such a condition, three alternatives are available to the directors to deal
with the situation:
(1) they can accept some
applications in full and totally reject the others;
(2) they can make a
pro-rata allotment to all; and
(3) they can adopt a
combination of the above two alternatives.
Pro-rata Allotment: When the directors opt to make a proportionate allotment
to all applicants it is called ‘pro-rata’ allotment, the excess application
money received is normally adjusted towards the amount due on allotment.
Under Subscription: Under subscription is a situation where number of shares
applied for is less than the number for which applications have been invited
for subscription.
Issue of Shares at a Premium: When a company issues its shares at a price
which is higher than its face value is called Issue of Shares at a Premium.
The difference between the par value and the selling price is called Premium.
The premium amount is credited to a separate account called ‘Securities
Premium Account’ and is shown under the title ‘Equity and Liabilities’ of the
company’s balance sheet under the head ‘Reserves and Surpluses’. It can be
used only for the following five purposes:
(a) to issue fully paid
bonus shares to the extent not exceeding unissued share capital of the
company;
(b) to write-off
preliminary expenses of the company;
(c) to write-off the
expenses of, or commission paid, or discount allowed
on any securities of the company; and
(d) to pay premium on the
redemption of preference shares or debentures of the company and
(e) Purchase of its own
shares (i.e., buy back of shares).
Accounting treatment for shares issued at a premium is Share Allotment
A/c Dr.
To Share Capital A/c
To Securities Premium Reserve A/c
(Amount due on allotment of shares @ Rs .... per share including premium)
Issue of Shares at a Discount
When a company issue shares at a price less than its face value is called
issue of shares at discount. The difference between face value and issue price
is called discount. Discount amount is debits to a separate account called
'Discount on Issue of Share' Account. Discount on issue of shares is in the
nature of capital loss for the company. In the balance sheet, 'Discount on
Issue of Shares Account' appears on the “Assets” side under the heading
'Miscellaneous Expenditure'.
As a general rule, a company cannot ordinarily issue shares at a discount. It
can do so only in cases such as ‘reissue of forfeited shares’ and issue of
sweat equity shares.
Sweat equity shares: These are such equity shares, which are issued by a
Company to its directors or employees at a discount or for consideration,
other than cash, for providing their know-how or making available rights in
the nature of intellectual property rights or value additions, by whatever
name called.
The company shall not issue sweat equity shares for more than fifteen percent
of the existing paid up equity share capital in a year or shares of the issue
value of rupees five crores, whichever is higher.
Issue of Shares for Consideration other than Cash: Usually, a company issues
shares for cash. There are instances where a company enters into an
arrangement with the vendors from whom it has purchased assets, the payment in
the form of fully paid shares of the company issued to them. The number of
shares to be issued to the vendor will be calculated as follows:
Amount Payable Number of shares to be issued =
Issue Price
Accounting treatment for Issue of Shares for Consideration other than Cash is;
On purchasing the asset
Asset a/c Dr.
To Vendor a/c On issue of shares
Vendor a/c Dr.
To Share capital a/c On issue of shares at premium
Vendor a/c Dr.
To Share Capital A/c
To Securities Premium Reserve A/c
Forfeiture of Shares: Forfeiture of shares is a process where the company
forfeits the shares of a member or shareholder who fails to pay the call on
shares or instalments of the issue price of his shares within a certain period
of time after they fall due. Cancellation shares on non payment of call money
is called Forfeiture of shares.
Accounting treatment for forfeiture of shares is (issued at Par) Share Capital
A/c Dr.(Called up amount)
To Share Forfeiture A/c (Paid up amount) To Share Allotment A/c
To Share Calls A/c (individually)
(..... shares forfeited for non-payment of allotment money and calls made)
The balance of shares forfeited account is shown as an addition to the total
paid-up capital of the company under the head ‘Share Capital’ under title
‘Equity and Liabilities’ of the Balance Sheet till the forfeited shares are
reissued.
Forfeiture of Shares issued at a Premium
Share Capital A/c Dr.
Securities Premium Reserve A/c
Dr.
To Share Forfeiture A/c To Share Allotment A/c
and/or
To Share Calls A/c (individually)
(..... shares forfeited for non-payment of allotment money and calls
made)
Re-issue of Forfeited Shares: If shares are forfeited the membership of the
shareholder stands cancelled and the shares become the property of the
company. Thereafter, the company has an option of selling such forfeited
shares. The sale of forfeited shares is called 'reissue of shares'. Forfeited
shares may be reissued as fully
paid at a par, premium, discount. When shares re-issued on discount the
discount allowed on reissue of forfeited shares should be debited to the
‘Forfeited Share Account’. The balance, if any, left in the Share-Forfeited
Account relating to reissued Shares, should be treated as capital profit and
transferred to Capital Reserve Account.
Accounting treatment for Re-issue of Forfeited Shares is
a) On re-issue of shares
Bank A/c Dr. (Issue price)
Share Forfeiture A/c Dr.
(Discount value)
To Share Capital A/c
(Re-issue of ...... forfeited shares at Rs.... per share as fully paid)
b) Transferring the balance
of share forfeiture account to Capital Reserve Share Forfeiture A/c
Dr.
To Capital Reserve
(Profit on reissue of forfeited shares transferred)
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