Issue of Shares | ISC Class 12 Accounts Notes

This note covers the meaning and categories of share capital, the procedure for issuing shares at par and at premium under the Companies Act, 2013, the issue of shares for considerations other than cash (to promoters, underwriters and vendors), calls in arrears and calls in advance with interest thereon, over-subscription and under-subscription including pro-rata allotment, forfeiture and reissue of shares at par, premium or discount, the recording of these transactions in the Journal, Cash Book, Journal Proper and Ledger, and the disclosure of share capital in a company's Balance Sheet.

What is share capital, and how is it classified?

A company is an artificial person that cannot generate its own capital; funds have to be collected from a large number of persons known as shareholders. The total amount contributed by them is pooled into a single share capital account rather than opening a separate account for every shareholder. In India, companies are formed and registered under the Companies Act, 2013 (except banking and insurance companies, which have their own separate laws), and it is this Act, together with guidelines of the Securities and Exchange Board of India (SEBI), that governs how share capital is raised and accounted for.

Definition: Share capital. The capital of a company raised by the issue of shares to the public, recorded in a common Share Capital Account because the number of shareholders is too large for individual capital accounts.

Categories of share capital

From an accounting point of view, share capital is classified into several categories, each representing a different stage between what a company may raise and what it has actually collected.

• Authorised capital (also called nominal or registered capital) is the amount of share capital a company is authorised to issue by its Memorandum of Association; it cannot raise more than this amount without changing the Memorandum.
• Issued capital is that part of the authorised capital actually offered to the public for subscription, including shares allotted to vendors and signatories to the Memorandum.
• Subscribed capital is that part of the issued capital actually subscribed by the public; it may equal or be less than issued capital.
• Called-up capital is that part of subscribed capital which the company has asked shareholders to pay; the remainder may be collected later as and when needed.
• Paid-up capital is the portion of called-up capital actually received; it equals called-up capital minus calls in arrears.
• Uncalled capital is that part of subscribed capital not yet called up.
• Reserve capital is the part of uncalled capital that a company resolves to call only in the event of winding up, available solely for creditors at that time.

Uncalled Capital = Subscribed Capital - Called-up Capital

An Indian illustration of the categories

Harsha Ltd. illustrates these distinctions with real figures. It was registered with an authorised capital of ₹25,00,000 divided into 2,50,000 equity shares of ₹10 each. The promoters of the company undertook to subscribe 25,000 equity shares of ₹10 each as soon as the company was incorporated, and this amount was paid by the subscribers and received by the company.

The company later issued, at par, a further 2,00,000 shares to the public for subscription. It received applications for 1,80,000 equity shares, and shares were allotted to all the applicants. Here, authorised capital remains ₹25,00,000 (2,50,000 shares); issued capital is the 2,25,000 shares actually offered, that is, 25,000 shares to the promoters plus 2,00,000 shares to the public; and subscribed capital is 2,05,000 shares, that is, 25,000 promoters' shares plus 1,80,000 shares subscribed by the public.

A bar graph with the three capital categories on the horizontal axis and ₹ value on the vertical axis would show authorised capital as the tallest bar at ₹25,00,000, issued capital as a shorter bar at ₹22,50,000 (2,25,000 shares), and subscribed capital as the shortest bar at ₹20,50,000 (2,05,000 shares), illustrating how each later stage can only narrow, never widen, the capital raised.

Examples such as Harsha Ltd., Sunrise Company Ltd. (New Delhi), Mona Earth Mover Limited and Jupiter Company Limited, all incorporated under Indian company law, show how these stages of capital work out in practice when real applications and allotments are recorded.

A company usually raises the amount on its shares in instalments: the first along with the application is called application money, the second is allotment money, and the remaining instalments are the first call, second call and so on, with "final" suffixed to the last instalment.

How is the amount of each instalment worked out?

The face value of a share is simply the sum of the instalments fixed for it. If a share of ₹100 is payable at ₹30 on application, ₹40 on allotment, ₹20 on first call and the balance on second and final call, the balance is ₹100 − ₹30 − ₹40 − ₹20 = ₹10 per share.

Balance on Final Call = Face Value - Sum of Earlier Instalments

This balance is what the company asks for when the last call is made, and it is credited to Share Capital in the usual way. Where the whole balance after allotment is collected in one call only, that call is termed the "First and Final Call".

What is the procedure for issue of shares at par and at premium under the Companies Act, 2013?

Shares are issued either at par, when the issue price equals the nominal (face) value, or at a premium, when the issue price exceeds the nominal value; the excess is called the premium.

Before any money is called, a company issues a prospectus inviting the public to subscribe. Applicants deposit their application money with a scheduled bank.

The company must receive its minimum subscription within 120 days of the prospectus; if not, application money must be returned within 130 days.

Definition: Minimum subscription. The minimum amount that, in the directors' opinion, must be raised to meet the needs of the business, such as the price of property purchased, preliminary expenses, repayment of borrowings for these purposes and working capital; under SEBI guidelines it cannot be less than 90% of the issued amount, and a refund delayed beyond 8 days of closure of the subscription list attracts interest at 15% under Section 73(2).

If minimum subscription is received, the directors proceed to allotment, sending letters of allotment to successful applicants and letters of regret to others. Allotment creates a valid contract between the company and the applicant, who then becomes a shareholder.

The journal entries follow a fixed pattern for application, allotment and each call.

1. On receipt of application money: Bank A/c Dr., To Share Application A/c.
2. On transfer of application money due on shares allotted: Share Application A/c Dr., To Share Capital A/c.
3. On refund of application money on rejected applications: Share Application A/c Dr., To Bank A/c.
4. On the amount due on allotment: Share Allotment A/c Dr., To Share Capital A/c (and To Securities Premium Reserve A/c where premium is called with allotment).
5. On receipt of allotment money: Bank A/c Dr., To Share Allotment A/c.
6. On each call falling due: Share (First/Second...) Call A/c Dr., To Share Capital A/c, and on receipt: Bank A/c Dr., To Share Call A/c.

Two statutory limits govern the timing and size of calls: the amount of any one call must not exceed 25% of the face value of a share, and there must be an interval of at least one month between two calls unless the Articles of Association provide otherwise.

Application money itself must be at least 5% of the face value of the share.

Where the company has no Articles of its own, Table F rules apply: a month between calls, a call not exceeding 25% of face value, at least 14 days' notice to shareholders, and calls made on a uniform basis within the same class of shares.

When shares are issued at a premium, the premium amount may technically be called at any stage but is generally called with allotment, and is credited to a separate Securities Premium Reserve account.

This balance can be used only for limited purposes: to issue fully paid bonus shares (not exceeding unissued capital), to write off preliminary expenses, to write off share issue expenses, commission or discount, to pay premium on redemption of preference shares or debentures, and for buy-back of the company's own shares.

Equity and preference shares are the only two classes a company may issue under the Companies Act; preference shares carry a preferential right to a fixed dividend and to repayment of capital on winding up before equity shareholders, while equity shares carry no such preferential right.

Formula: Securities Premium = Issue Price − Face Value (per share), the difference credited to the Securities Premium Reserve Account.

A box diagram showing Authorised Share Capital at the top splitting into Issued Capital and Unissued Capital; Issued Capital splitting into Subscribed Capital and the unsubscribed portion; and Subscribed Capital splitting into "Subscribed and Fully Paid up" and "Subscribed but not Fully Paid up".

Worked example 1. Mona Earth Mover Limited decided to issue 12,000 shares of ₹100 each payable at ₹30 on application, ₹40 on allotment, ₹20 on first call and the balance on second and final call.

Applications were received for 13,000 shares. The directors rejected applications for 1,000 shares and refunded the money in full. Allotment money was received in full on all 12,000 shares, and all call money was received except on 100 shares.

Answer: Application money received = 13,000 × ₹30 = ₹3,90,000. Transferred to Share Capital for 12,000 shares = ₹3,60,000, and ₹30,000 refunded on the 1,000 rejected shares. Allotment due = 12,000 × ₹40 = ₹4,80,000, fully received.

First call due = 12,000 × ₹20 = ₹2,40,000; received = ₹2,38,000 (short by 100 × ₹20 = ₹2,000). Second and final call due = 12,000 × ₹10 = ₹1,20,000; received = ₹1,19,000 (short by 100 × ₹10 = ₹1,000). The unpaid amounts are calls in arrears.

Worked example 2. Jupiter Company Limited issued 35,000 equity shares of ₹10 each at a premium of ₹2, payable ₹3 on application, ₹5 on allotment (including premium) and the balance on first and final call. The issue was fully subscribed and all money was duly received.

Answer: Application money = 35,000 × ₹3 = ₹1,05,000, transferred wholly to Share Capital. Allotment due = 35,000 × ₹5 = ₹1,75,000, of which ₹1,05,000 (face value ₹3 per share) goes to Share Capital and ₹70,000 (premium ₹2 per share) to Securities Premium Reserve.

First and final call = ₹10 − ₹3 − ₹3 = ₹4 per share, due and received = 35,000 × ₹4 = ₹1,40,000, credited to Share Capital.

How are shares issued for considerations other than cash, including to promoters, underwriters and vendors?

A company sometimes issues fully paid shares instead of cash. When assets are purchased from vendors, the vendor agrees to accept payment in shares; the number of shares to be issued depends on the amount payable and the issue price.

Formula: Number of Shares = Amount Payable ÷ Issue Price

For example, if a company owes a vendor ₹5,40,000 and issues shares of ₹100 each, it must issue 5,400 shares if issued at par (₹5,40,000 ÷ ₹100), but only 4,500 shares if issued at a 20% premium, that is at ₹120 per share (₹5,40,000 ÷ ₹120).

The journal entries record the asset purchase (Asset A/c Dr., To Vendor's A/c), followed by the discharge of the vendor's account by shares: Vendor's A/c Dr., To Share Capital A/c (and To Securities Premium Reserve A/c if issued at a premium).

Companies may also issue shares to promoters who have rendered services in forming the company, or to underwriters in settlement of underwriting commission, instead of paying them in cash.

Shares issued to promoters for their services are usually recorded by debiting a Goodwill Account or an Incorporation Costs Account and crediting Share Capital (with Securities Premium Reserve credited too if issued at a premium); shares issued to underwriters are recorded by debiting an Underwriting Commission Account and crediting Share Capital in the same way.

In every case, no cash passes; only the number of shares calculated from the amount owed and the issue price is allotted.

Worked example 3. Jindal and Company purchased a machine from High Life Machine Limited for ₹3,80,000. As per the purchase agreement, ₹20,000 was paid in cash and the balance by issue of shares of ₹100 each. Shares may be issued (a) at par, or (b) at a 20% premium.

Answer: Balance payable by shares = ₹3,80,000 − ₹20,000 = ₹3,60,000. (a) At par: number of shares = ₹3,60,000 ÷ ₹100 = 3,600 shares; entry: High Life Machine Limited A/c Dr. ₹3,60,000, To Share Capital A/c ₹3,60,000.

(b) At 20% premium (issue price ₹120): number of shares = ₹3,60,000 ÷ ₹120 = 3,000 shares; entry: High Life Machine Limited A/c Dr. ₹3,60,000, To Share Capital A/c ₹3,00,000, To Securities Premium Reserve A/c ₹60,000.

What are calls in arrears and calls in advance, and how is interest calculated on each?

Calls in arrears

When a shareholder fails to pay the amount due on allotment or on any call, the unpaid amount is known as calls in arrears (or unpaid calls). It represents the debit balance of all the calls accounts and is shown as a deduction while disclosing share capital.

Definition: Calls in arrears. The amount due from a shareholder on allotment or on any call which remains unpaid; it is deducted from called-up capital in the notes to accounts to arrive at paid-up capital.

Where the Articles of Association are silent, the rule in Table F applies: interest at a rate not exceeding 10% per annum may be charged on calls in arrears for the period between the day fixed for payment and the date of actual payment.

If nothing is specified, there is no need to record interest on calls in arrears.

Formula: Interest on Calls = Amount Unpaid × Rate × Time

Calls in advance

The opposite situation is calls in advance, where a shareholder pays a part or the whole of a call not yet made.

This amount is a liability of the company, credited to a "Calls in Advance" account and adjusted against the relevant call when it becomes due.

Table F permits interest on calls in advance at a rate not exceeding 12% per annum, again only if the Articles provide for it.

The balance in Calls in Advance is shown separately under current liabilities and is not added to paid-up capital.

Worked example 4. Konica Limited issued 1,000 shares of ₹100 each payable ₹25 on application, ₹30 on allotment and ₹20 on first call. Application and allotment money was received in full.

On the first call, a shareholder holding 100 shares failed to pay, while another shareholder holding 50 shares paid the entire remaining amount in advance. No other call was made.

Answer: First call due = 1,000 × ₹20 = ₹20,000. From the shareholder with 100 shares, ₹2,000 (100 × ₹20) was unpaid, recorded as calls in arrears.

From the shareholder with 50 shares, the amount paid in advance for the yet-to-be-made calls (₹25 per share on the remaining face value) = 50 × ₹25 = ₹1,250, recorded as calls in advance.

Cash actually received on the first call = ₹20,000 − ₹2,000 + ₹1,250 = ₹19,250.

How is interest on calls in arrears and calls in advance computed?

Interest on calls in arrears is charged only if the Articles of Association provide for it; failing that, Table F allows a maximum of 10% per annum on the unpaid amount, for the period between the day fixed for payment and the date of actual payment.

Interest on calls in advance is payable, if the Articles provide for it, at a maximum of 12% per annum under Table F, from the date the money is received up to the date the call falls due.

When a defaulting shareholder later pays the arrears together with interest, the entry is: Bank A/c Dr., To Calls in Arrears A/c, To Interest on Calls in Arrears A/c. Interest paid on advance money is recorded as: Interest on Calls in Advance A/c Dr., To Bank A/c.

Worked example 5. Cronic Limited issued 10,000 equity shares of ₹10 each payable ₹2.50 on application, ₹3 on allotment, ₹2 on first call and ₹2.50 on second and final call. All shares were fully subscribed and paid except 100 shares on which the second and final call was not paid. The Articles provide interest on calls in arrears at 10% per annum, and the amount was received three months after the due date.

Answer: Unpaid amount = 100 × ₹2.50 = ₹250. Interest = ₹250 × 10% × 3/12 = ₹6.25.

Entry on receipt: Bank A/c Dr. ₹256.25, To Calls in Arrears A/c ₹250, To Interest on Calls in Arrears A/c ₹6.25.

Worked example 6. In the same company, a shareholder holding 200 shares paid the second and final call of ₹2.50 per share, amounting to ₹500, six months before it fell due. The Articles allow interest on calls in advance at 12% per annum.

Answer: Interest = ₹500 × 12% × 6/12 = ₹30.

Entry on payment of interest: Interest on Calls in Advance A/c Dr. ₹30, To Bank A/c ₹30. When the call falls due, Calls in Advance A/c Dr. ₹500, To Share Second and Final Call A/c ₹500.

How are over-subscription and under-subscription handled, including pro-rata allotment?

Over-subscription and pro-rata allotment

When applications for more shares are received than those offered, it is a case of over-subscription, usually seen in well-managed, financially strong companies.

Directors have three options: accept some applications in full and reject the rest, make a pro-rata allotment to all applicants, or combine both approaches, which is the most common course in practice.

Definition: Pro-rata allotment. Allotment of shares to applicants in a fixed proportion of the shares applied for, used when applications exceed the shares offered, with the excess application money adjusted towards the amount due on allotment.

Where applications in excess of what is required are rejected outright, the money received on them is refunded in full, and application money on the accepted shares is transferred to Share Capital in the ordinary way.

Where pro-rata allotment is made, the excess application money received is adjusted towards the amount due on allotment; if the excess is more than the allotment amount, the remainder may be refunded or credited to calls in advance.

A combination of the two approaches rejects some applications outright and makes pro-rata allotment to the remainder, refunding money on rejected applications and adjusting the pro-rata applicants' excess towards allotment and, if large enough, the subsequent calls.

Where shares are issued at a premium payable on allotment, the excess application money kept on pro-rata allotment is adjusted towards the whole amount due on allotment, Securities Premium included, and only any surplus left after that is refunded.

Under-subscription

Under-subscription is the opposite situation, where applications received are fewer than the shares offered. Allotment is then confirmed only to the number of shares actually applied for, provided the minimum subscription has been received; if minimum subscription is not reached, the entire amount received must be refunded.

A bar graph with "shares offered" and "shares applied for" on the horizontal axis and number of shares (in lakhs) on the vertical axis would show a short bar of 1,00,000 shares offered against a much taller bar of 4,00,000 shares applied for, with application money received (₹20,00,000) correspondingly four times the ₹5,00,000 that would have matched the shares offered, making the extent of over-subscription visible at a glance.

Worked example 7. Janta Papers Limited invited applications for 1,00,000 equity shares of ₹25 each, payable ₹5 on application, ₹7.50 on allotment, ₹7.50 on first call and ₹5 on second and final call. Applications were received for 4,00,000 shares.

The directors decided to make a pro-rata allotment of 25% of the shares applied for to every applicant, applying the balance of application money towards the amount due on allotment, and refunding anything remaining thereafter.

Answer: Total application money received = 4,00,000 × ₹5 = ₹20,00,000. Transferred to Share Capital for the 1,00,000 shares allotted = 1,00,000 × ₹5 = ₹5,00,000.

Allotment due = 1,00,000 × ₹7.50 = ₹7,50,000; this amount is adjusted first from the excess application money (₹20,00,000 − ₹5,00,000 = ₹15,00,000 excess), so ₹7,50,000 of the excess is credited to Share Allotment, and the balance of ₹7,50,000 excess is refunded. No further cash is therefore received from applicants at allotment.

How are shares issued at par and premium, and shares issued at a discount, recorded and restricted?

Shares issued at par are recorded with the full nominal value credited to Share Capital. Shares issued at a premium credit the excess to Securities Premium Reserve, as shown above.

Shares are said to be issued at a discount when the issue price is less than the nominal (face) value; the difference between the two is the discount on issue. For example, when a share with a nominal value of ₹100 is issued at ₹98, it is said to have been issued at a discount of two per cent, and the ₹2 shortfall is the discount amount.

As a general rule, a company cannot ordinarily issue shares at a discount; such an issue is possible only in limited situations, such as the reissue of forfeited shares.

This restriction is why most of the accounting in this unit concerns par and premium issues rather than discounted fresh issues; discounted issues arise almost entirely through the forfeiture-and-reissue route rather than through a fresh public issue of shares.

Formula: Discount on Issue = Face Value − Issue Price (per share), the shortfall that arises when a share is issued below its nominal value.

How are shares forfeited for non-payment of allotment or call money?

When a shareholder fails to pay allotment money or call money, the company may, under authority usually derived from Table F, forfeit the shares, cancelling the allotment and treating the amount already received as forfeited to the company.

Definition: Forfeiture of shares. Cancellation of a shareholder's allotment by the company for non-payment of allotment or call money, with the amount already received retained by the company, following the procedure in the Articles of Association.

On forfeiture, all entries relating to the forfeited shares (except those relating to premium already received) must be reversed.

Share Capital is debited with the called-up amount, the unpaid calls (or Calls in Arrears) account is credited with the amount still owed, and the Share Forfeiture account is credited with the amount actually paid up by the shareholder before default.

1. Debit Share Capital A/c with the called-up amount on the forfeited shares.
2. Credit the relevant unpaid Allotment/Call A/c (or Calls in Arrears A/c) with the amount still unpaid.
3. Credit Share Forfeiture A/c with the amount already received on the forfeited shares.
4. If premium on the forfeited shares has not been received, also debit Securities Premium Reserve A/c with the unreceived premium.

If the shares had been issued at a premium and the premium was fully received before default, Securities Premium Reserve is not disturbed at forfeiture; only Share Capital is debited at the called-up amount.

If the premium itself remains unpaid, Securities Premium Reserve is debited along with Share Capital. The balance in the Share Forfeiture account is shown as an addition to paid-up share capital in the Balance Sheet until the shares are reissued.

Worked example 8. Honda Limited issued 10,000 equity shares of ₹100 each payable ₹20 on application, ₹30 on allotment, ₹20 on first call and ₹30 on second and final call. All 10,000 shares were applied for and allotted.

All money was received except both calls on 300 shares held by one shareholder, and these shares were forfeited.

Answer: Amount called up on the 300 shares = 300 × ₹100 = ₹30,000. Amount unpaid = calls of ₹20 + ₹30 = ₹50 per share × 300 = ₹15,000 (₹6,000 on first call, ₹9,000 on second and final call).

Amount already received (application ₹20 + allotment ₹30 = ₹50 per share) = 300 × ₹50 = ₹15,000, credited to Share Forfeiture.

Entry: Share Capital A/c Dr. ₹30,000, To Share First Call A/c ₹6,000, To Share Second and Final Call A/c ₹9,000, To Share Forfeiture A/c ₹15,000.

How are forfeited shares reissued at par, premium or discount?

Directors may either cancel forfeited shares or, more commonly, reissue them, at par, at a premium, or at a discount.

The discount allowed on reissue cannot exceed the amount already received on those shares at forfeiture, and any discount is debited to the Share Forfeiture Account.

Any balance left in the Share Forfeiture Account for the shares actually reissued is a capital profit, transferred to Capital Reserve; it is only the proportionate balance relating to the shares reissued that is transferred, not the whole account, if part of the forfeited shares remain unissued.

When forfeited shares are reissued at par, the full amount received is debited to Bank and credited to Share Capital, and the whole balance in the Share Forfeiture Account relating to those shares becomes a capital profit.

When they are reissued at a premium, Bank is debited with the amount received including the premium, Share Capital is credited with the called-up amount, and the premium is credited to Securities Premium Reserve; the Share Forfeiture balance on the reissued shares is then transferred to Capital Reserve.

Worked example 9. A company forfeited 200 shares of ₹10 each on which ₹600 had been received in total before default. The company reissued these 200 shares for ₹1,800 as fully paid.

Answer: Maximum discount permissible = amount already received = ₹600. Discount actually allowed on reissue = (200 × ₹10) − ₹1,800 = ₹2,000 − ₹1,800 = ₹200.

Entry: Bank A/c Dr. ₹1,800, Share Forfeiture A/c Dr. ₹200, To Share Capital A/c ₹2,000. Balance remaining in Share Forfeiture A/c = ₹600 − ₹200 = ₹400, transferred to Capital Reserve: Share Forfeiture A/c Dr. ₹400, To Capital Reserve ₹400.

Worked example 10. The directors of Poly Plastic Limited resolved that 200 equity shares of ₹100 each be forfeited for non-payment of the second and final call of ₹30 per share. Out of these, 150 shares were reissued at ₹60 per share to Mohit.

Answer: Amount received before forfeiture = ₹100 − ₹30 = ₹70 per share, so Share Forfeiture on 200 shares = 200 × ₹70 = ₹14,000. On reissue of 150 shares at ₹60, the discount is ₹100 − ₹60 = ₹40 per share, that is 150 × ₹40 = ₹6,000, debited to Share Forfeiture.

Entry: Bank A/c Dr. ₹9,000 (150 × ₹60), Share Forfeiture A/c Dr. ₹6,000, To Share Capital A/c ₹15,000 (150 × ₹100).

Forfeiture balance relating to the 150 reissued shares = 150 × ₹70 = ₹10,500; less discount ₹6,000 = ₹4,500 transferred to Capital Reserve. The remaining 50 shares carry a balance of 50 × ₹70 = ₹3,500 in the Share Forfeiture Account.

Worked example 11. A company forfeited 100 shares of ₹10 each, fully called up, on which ₹8 per share had been received. It reissued all 100 shares at ₹12 per share as fully paid.

Answer: Bank A/c Dr. ₹1,200 (100 × ₹12), To Share Capital A/c ₹1,000 (100 × ₹10), To Securities Premium Reserve A/c ₹200 (100 × ₹2).

The whole balance in Share Forfeiture on these shares, 100 × ₹8 = ₹800, is a capital profit: Share Forfeiture A/c Dr. ₹800, To Capital Reserve A/c ₹800.

How is share capital disclosed in a company's Balance Sheet?

Share capital is disclosed under "Equity and Liabilities" as "Shareholders' Funds", with a detailed Note to Accounts showing Authorised Capital, Issued Capital, Subscribed Capital (split between "Subscribed and fully paid up" and "Subscribed but not fully paid up"), less Calls in Arrears, and the resulting total.

Notes to accounts for share capital

This disclosure comes from the example of Sunrise Company Ltd., New Delhi, an Indian company which registered capital of ₹40,00,000 divided into 4,00,000 shares of ₹10 each, offered 2,00,000 shares for subscription, received applications for 2,50,000 shares, allotted 2,00,000 and rejected 50,000, did not make the final call, and found calls unpaid on 2,000 shares.

Securities Premium Reserve, where it exists, is shown under "Reserves and Surplus", and any balance in the Share Forfeiture Account is added to the paid-up capital figure until the forfeited shares are reissued. Companies incorporated in India under the Companies Act, 2013, such as Sunrise Company Ltd. and Harsha Ltd., must follow this same format of disclosure, registering with the Registrar of Companies under the Ministry of Corporate Affairs before they can issue shares to the public.

Formula: Paid-up Capital = Called-up Capital − Calls in Arrears

How are share capital transactions recorded in the Journal, Cash Book, Journal Proper and Ledger?

Although every instalment of share money can be recorded through journal entries as shown above, in practice companies with a large number of transactions often record the receipts directly in the Cash Book rather than passing separate journal entries for every receipt, since cash received on application, allotment and calls flows through the bank account in bulk.

Cash Book and combined ledger accounts

A combined Share Application and Allotment Account may also be opened in the Ledger, on the reasoning that allotment without application is impossible and application without allotment is meaningless, so the two stages are closely inter-related.

1. Application money is received and entered in the Cash Book (Bank column) as a debit, with the corresponding credit posted to the Share Application (or combined Application and Allotment) Account in the Ledger.
2. At allotment, the amount due is journalised (Share Allotment A/c Dr., To Share Capital A/c, and To Securities Premium Reserve A/c if applicable) and posted to the Ledger.
3. Receipts on allotment and on each call are entered in the Cash Book and posted to the respective Ledger accounts, closing the Share Allotment and Share Call accounts once fully received.
4. Where forfeiture or reissue occurs, the Journal Proper records the entries reversing the shareholder's account and crediting Share Forfeiture, which are then posted to the Share Capital, Share Forfeiture and Capital Reserve accounts in the Ledger.

Whatever the recording method, the final balances carried to the Ledger accounts for Share Capital, Securities Premium Reserve, Calls in Arrears, Calls in Advance and Share Forfeiture are what appear in the notes to the Balance Sheet.

How is a call receipt recorded through the Cash Book and posted to the Ledger?

Suppose a company has 10,000 equity shares of ₹10 each on which a first call of ₹3 per share is due, and all the money is received except on 200 shares. The amount due is first journalised in the Journal Proper: Share First Call A/c Dr. ₹30,000, To Share Capital A/c ₹30,000.

The actual receipt of ₹29,400 (9,800 shares × ₹3) is entered on the debit side of the Cash Book in the Bank column, with "To Share First Call A/c" written in the particulars column. The unpaid ₹600 (200 shares × ₹3) is recorded as Calls in Arrears.

In the Ledger, the Share First Call Account is debited with ₹30,000 and credited with ₹29,400 from the Cash Book and ₹600 from the Calls in Arrears Account, so it closes with no balance. The Share Capital Account receives a credit of ₹30,000, and the Calls in Arrears Account shows a debit balance of ₹600, deducted from called-up capital in the Balance Sheet.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

How does ASBA change the payment of application money?

The complete process behind a public issue also includes Applications Supported by Blocked Amount (ASBA), under which the applicant's bank only blocks, rather than debits, the application money. The bank removes this lien if no shares are allotted, and debits the account only for the shares actually allotted. This differs from the simpler bank-deposit method assumed throughout the worked examples above, where application money is deposited in full with a scheduled bank at the time of application.

How are companies classified by liability and by membership?

Companies are also classified by the liability of their members, as companies limited by shares, companies limited by guarantee, and unlimited companies, and separately by membership, as public companies, private companies and One Person Companies (OPC). An OPC, formed under the Companies Act, 2013 by a single natural person who is an Indian citizen resident in India, cannot carry on non-banking financial investment activities, and its paid-up share capital cannot exceed ₹50 lakh, with average annual turnover capped at ₹2 crore over three years.

Formula: Minimum Subscription = 90% × Issued Capital, the least amount that must be raised before allotment can proceed, under SEBI guidelines.

These classifications and the ASBA mechanism give useful background on how share applications are processed today and how companies are structured, though the detailed accounting for bonus shares, rights issues, private placement, sweat equity and employee stock options falls outside this unit.

Glossary

• Share capital — the capital of a company raised through the issue of shares, recorded in a common Share Capital Account.
• Authorised capital — the maximum capital a company is permitted to issue, as stated in its Memorandum of Association.
• Issued capital — the part of authorised capital actually offered to the public for subscription.
• Subscribed capital — the part of issued capital actually taken up by applicants.
• Called-up capital — the part of subscribed capital the company has asked shareholders to pay.
• Paid-up capital — the called-up capital actually received from shareholders.
• Securities premium — the excess of issue price over the nominal value of a share, credited to a reserve account.
• Minimum subscription — the least amount, under SEBI guidelines not less than 90% of the issued amount, that must be raised before allotment can proceed.
• Calls in arrears — amounts due on allotment or calls that remain unpaid by shareholders.
• Calls in advance — amounts received from shareholders before the related call has actually been made.
• Pro-rata allotment — allotment of shares in a fixed proportion to all applicants when applications exceed the shares on offer.
• Over-subscription — a situation where applications for more shares are received than the number offered.
• Under-subscription — a situation where applications received are fewer than the shares offered.
• Forfeiture of shares — cancellation of a shareholder's allotment for non-payment of allotment or call money.
• Capital reserve — the capital profit on reissue of forfeited shares, transferred from the Share Forfeiture Account.

Common errors and misconceptions

• Misconception: Premium received at the time of forfeiture is always reversed along with the called-up capital. Correct: Securities Premium Reserve is debited at forfeiture only if the premium itself has not been received; if it was fully received, only the called-up amount in Share Capital is reversed.
• Misconception: In pro-rata allotment at a premium, excess application money is adjusted first against the premium. Correct: The excess is adjusted first towards share capital, and only any further excess is applied towards Securities Premium.
• Misconception: Shares can be issued at a discount whenever the directors wish. Correct: Shares cannot ordinarily be issued at a discount; discount is permitted mainly on reissue of forfeited shares.
• Misconception: The discount allowed on reissue of forfeited shares can be any amount the directors decide. Correct: The discount cannot exceed the amount already received on those shares at the time of forfeiture.
• Misconception: The whole balance of the Share Forfeiture Account is transferred to Capital Reserve whenever any forfeited shares are reissued. Correct: Only the proportionate balance relating to the shares actually reissued is transferred; the rest remains against the shares still unissued.
• Misconception: Calls in advance form part of paid-up capital. Correct: Calls in advance are a liability shown separately under current liabilities and are not added to paid-up capital until the related call is actually made.
• Misconception: Interest on calls in arrears and calls in advance must always be charged. Correct: It is charged only if the Articles of Association provide for it, or, failing that, under the maximum rates in Table F (10% on arrears, 12% on advance); otherwise no interest need be recorded.

Exam-style questions with model answers

Q1. Choose the correct option: when the Articles of Association are silent, interest on calls in arrears is charged under Table F at a rate not exceeding (a) 6% per annum, (b) 8% per annum, (c) 10% per annum, (d) 12% per annum. [1 mark]

1. (c) 10% per annum. Table F allows interest on calls in arrears at a rate not exceeding 10% per annum, for the period between the day fixed for payment and the date of actual payment.

Q2. Assertion: Forfeited shares can be reissued at a discount. Reason: The amount received by the company on forfeited shares can be used to cover the discount on the reissue of those shares. Choose the correct option: (a) both true and Reason explains Assertion, (b) both true but Reason does not explain Assertion, (c) Assertion true, Reason false, (d) both false. [1 mark]

1. (a) Both Assertion and Reason are true, and the Reason is the correct explanation. The discount on reissue is debited to the Share Forfeiture Account, and it cannot exceed the amount already received on those shares.

Q3. Define calls in advance and state where the balance of the Calls in Advance Account is shown in the Balance Sheet. [2 marks]

1. Calls in advance are amounts paid by a shareholder before the related call has actually been made; the amount is credited to the Calls in Advance Account and adjusted against the call when it becomes due.
2. It is a liability of the company and is shown separately under current liabilities, as a sub-head of other current liabilities, and is not added to paid-up capital.

Q4. Distinguish between calls in arrears and calls in advance. [3 marks]

1. Calls in arrears are amounts due from shareholders on allotment or a call that remain unpaid, representing a debit balance and a shortfall to the company.
2. Calls in advance are amounts shareholders pay before the related call is actually made, representing a liability of the company that is later adjusted against the call when due.
3. Interest on calls in arrears, if the Articles provide for it, is charged at a maximum of 10% per annum under Table F, while interest on calls in advance is payable at a maximum of 12% per annum.

Q5. Alpha Ltd. issued 5,000 shares of ₹10 each payable ₹3 on application and ₹7 on allotment. Applications were received for 6,000 shares; the directors rejected applications for 1,000 shares and refunded the money in full. Allotment money was received on all 5,000 shares allotted. Pass the journal entries. [4 marks]

1. Bank A/c Dr. ₹18,000, To Share Application A/c ₹18,000 (application money on 6,000 shares @ ₹3).
2. Share Application A/c Dr. ₹15,000, To Share Capital A/c ₹15,000 (transfer of application money on 5,000 shares allotted).
3. Share Application A/c Dr. ₹3,000, To Bank A/c ₹3,000 (refund on 1,000 rejected shares).
4. Share Allotment A/c Dr. ₹35,000, To Share Capital A/c ₹35,000 (allotment due on 5,000 shares @ ₹7); Bank A/c Dr. ₹35,000, To Share Allotment A/c ₹35,000 (allotment money received).

Q6. Beta Ltd. issued 10,000 equity shares of ₹10 each at a premium of ₹2, payable ₹3 on application, ₹5 on allotment (including the whole premium), and the balance on first and final call. The issue was fully subscribed and all money was received. Pass the journal entries for allotment and the first and final call. [4 marks]

1. Share Allotment A/c Dr. ₹50,000, To Share Capital A/c ₹30,000, To Securities Premium Reserve A/c ₹20,000 (allotment due on 10,000 shares @ ₹5, including ₹2 premium).
2. Bank A/c Dr. ₹50,000, To Share Allotment A/c ₹50,000 (allotment money received).
3. Share First and Final Call A/c Dr. ₹40,000, To Share First and Final Call A/c ₹40,000 (balance of ₹4 per share due on 10,000 shares).
4. Bank A/c Dr. ₹40,000, To Share First and Final Call A/c ₹40,000 (call money received).

Q7. A company owes a vendor ₹2,40,000 for machinery purchased, to be settled entirely by issue of shares of ₹100 each. Calculate the number of shares to be issued (a) at par, and (b) at a premium of 20%. [3 marks]

1. At par, issue price = ₹100, so number of shares = ₹2,40,000 ÷ ₹100 = 2,400 shares.
2. At a 20% premium, issue price = ₹120, so number of shares = ₹2,40,000 ÷ ₹120 = 2,000 shares.
3. Fewer shares are needed when issued at a premium because each share carries a higher issue price, so the same debt is discharged with fewer shares.

Q8. Gamma Ltd. forfeited 500 shares of ₹10 each, called up to ₹8 per share, on which only the application and allotment money of ₹5 per share had been received; the two calls of ₹3 remained unpaid. Of these, 300 shares were later reissued as fully paid for ₹7 per share. Pass the journal entries for forfeiture, reissue and transfer to capital reserve. [6 marks]

1. Forfeiture: Share Capital A/c Dr. ₹4,000 (500 × ₹8 called up), To Calls in Arrears A/c ₹1,500 (500 × ₹3 unpaid), To Share Forfeiture A/c ₹2,500 (500 × ₹5 received).
2. Reissue of 300 shares: Bank A/c Dr. ₹2,100 (300 × ₹7), Share Forfeiture A/c Dr. ₹300 (discount of ₹1 per share on 300 shares, since called-up value is ₹8), To Share Capital A/c ₹2,400 (300 × ₹8).
3. Forfeiture balance relating to the 300 reissued shares = 300 × ₹5 = ₹1,500; after deducting the discount of ₹300, the capital profit is ₹1,200.
4. Transfer to Capital Reserve: Share Forfeiture A/c Dr. ₹1,200, To Capital Reserve A/c ₹1,200.
5. The remaining balance in Share Forfeiture Account, relating to the 200 shares not yet reissued, is 200 × ₹5 = ₹1,000, which stays in the account and is shown added to paid-up capital until these shares too are reissued.
6. The discount allowed on reissue (₹1 per share) did not exceed the amount earlier received on those shares (₹5 per share), so the reissue was within the permitted limit.

Q9. Delta Ltd. has an authorised capital of 5,00,000 shares of ₹10 each. It issued 3,00,000 shares of ₹10 each, all subscribed, called up to ₹8 per share, with calls in arrears of ₹20,000. Prepare the Notes to Accounts showing Share Capital. [5 marks]

1. Authorised Capital: 5,00,000 shares of ₹10 each = ₹50,00,000.
2. Issued Capital: 3,00,000 shares of ₹10 each = ₹30,00,000.
3. Subscribed Capital: 3,00,000 shares of ₹10 each, ₹8 called up = ₹24,00,000.
4. Less: Calls in Arrears = ₹20,000.
5. Net Subscribed Capital (shown under Shareholders' Funds) = ₹24,00,000 − ₹20,000 = ₹23,80,000.

Key takeaways

• Share capital moves through authorised, issued, subscribed, called-up and paid-up stages, each narrower than the last.
• Minimum subscription cannot be less than 90% of the issued amount, and failure to raise it means refunding the entire amount.
• Shares issued at a premium credit the excess over face value to Securities Premium Reserve, usable only for specified statutory purposes.
• Shares issued to promoters, underwriters or vendors for considerations other than cash are recorded without any cash entry, only the share issue entries.
• In pro-rata allotment at a premium, excess application money is adjusted first to share capital and only the remainder to premium.
• Calls in arrears reduce paid-up capital below called-up capital; calls in advance are a liability, not part of paid-up capital.
• Forfeiture reverses all entries except premium already received, crediting Share Forfeiture with the amount paid up before default.
• Discount on reissue of forfeited shares can never exceed the amount earlier received on those shares.
• Only the proportionate Share Forfeiture balance relating to the reissued shares is transferred to Capital Reserve.
• Share capital is disclosed under Shareholders' Funds with authorised, issued, subscribed and paid-up figures shown separately in the Notes to Accounts.

Test yourself

What is the difference between issued capital and subscribed capital?

Issued capital is the part of authorised capital offered to the public; subscribed capital is the part of issued capital actually taken up by applicants, which may be less than issued capital.

Why can a company not refund application money simply by choice if minimum subscription is not received?

SEBI guidelines require minimum subscription of at least 90% of the issued amount before allotment; if this is not met, the company must refund the entire subscription amount, and delay beyond 8 days attracts interest at 15%.

In pro-rata allotment at a premium, which account is adjusted first with the excess application money?

The excess application money is adjusted first towards the share capital due on allotment; only any amount still remaining after that is applied towards Securities Premium.

What happens to Securities Premium Reserve at forfeiture if the premium had already been fully received?

Securities Premium Reserve is not touched; only Share Capital is debited with the called-up amount, since the premium is not reversible once actually received.

What is the maximum discount that can be allowed when reissuing forfeited shares?

The discount cannot exceed the amount already received on those shares at the time of forfeiture, which was credited to the Share Forfeiture Account.

How is the capital profit on reissue of forfeited shares treated if only some of the forfeited shares are reissued?

Only the proportionate balance of the Share Forfeiture Account relating to the shares actually reissued is transferred to Capital Reserve; the rest stays against the unissued shares.

Where is the balance of Calls in Advance shown in the Balance Sheet?

It is shown separately under current liabilities, as it is a liability of the company and is not added to paid-up capital until the related call falls due.