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Syllabus
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Share capital:
Meaning, nature and types
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Accounting for
share capital: issue and allotment of equity and preference
shares, private placement of shares, meaning of employee stock
option plan, public subscription of shares; over subscription
and under subscription; issue at par, premium and at discount;
calls in advance, calls in arrears, issue of shares for
consideration other than cash
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Forfeiture of
shares: accounting treatment, re-issue of forfeited shares
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Presentation of
Share Capital and Debenture in company’s Balance Sheet
(25 Marks for Shares and Debentures together)
Joint Stock Company is the
most practical form of organization for large scale business. In
India the Indian Companies Act of 1956 governs joint stock
companies. The capital of the company is divided into shares and
the owners hold shares of capital. They are therefore known as
shareholders of the company.
The most striking feature
of a joint stock company is its ownership structure. The capital
of a joint stock company is divided into small shares of fixed
value. This facilitates easy investment and easy transfer.
Shareholders do not directly mange the company. They elect
directors who carry out management. The shareholders have the
safety of limited liability. In the event of extreme loss or
liquidation with excessive outside liability, the non invested
wealth of a shareholder is not affected. The face value of the
shares held by a person is the maximum amount that he can lose
in a joint stock company. If the shares are fully paid up he
need not pay anything further even if the company is liquidated
with heavy unsettled claims. If the shares held are partly paid
up, a shareholder might be asked to pay the unpaid portion of
the shares.
Shares can be sold and
purchased through the stock exchange. By purchasing shares a
person gets part ownership of the business. A share holder does
not attain an automatic right to manage the company. Directors
are the people who manage the business. They are elected by
shareholders. Thus a shareholder can vote to elect directors. He
can also contest in the election to become director.
A joint stock company is
regarded as an artificial person. It is considered to have an
identity apart from the shareholders. A company can enter into
contract, buy or sell properties in its own name, file lawsuits
or can be sued. It can even file suit against its own
shareholders.
Share capital is basically
classified into equity and preference share capital. Equity
capital is raised by the issue of equity shares, which are the
most common type of shares. The benefits received by equity
shares are directly related to the performance of the business.
When the business earns good profit equity shareholders will get
more dividends.
Preference shares other
hand are the ones having priority in the payment of dividend and
repayment of capital in the event of liquidation of a company.
Divided for the preference shares are paid at a prescribed rate.
Preference shareholders have fixed income irrespective of the
performance of the business. Equity dividend is declared each
year, which will vary according to the profit earned by the
business. The equity shareholders are the ones who actually bear
the risk in business. When the performance of the business is
good, they get a high percentage of income. The value of shares
will also increase in the market. Capital appreciation is the
prime attraction of equity shares in a company having
consistently good performance.
Equity and Preference
share capital are two basic channels of share capital. Apart
from this basic classification, share capital may be referred by
different qualifying terms highlighting certain specific aspects
of share capital. In this regard following terms are used to
qualify share capital.
This is the maximum amount
of capital a company is authorised to raise from the public.
Authorized capital is fixed little higher than the immediate
capital requirement of the business because authorised capital
is specified in the Memorandum of Association of the company and
if the company needs more capital in the near future it cannot
do so without first altering the memorandum of association.
A company will raise
capital from the public only to the extent it needs money for
investment. Unused fund indicates inefficiency. The portion of
authorized capital that is offered to the public for
subscription is known as issued capital.
When the shares are
offered to the public there is no guarantee that the public will
purchase all of them. The part of the issued capital that is
actually subscribed by the public is known as subscribed
capital.
When shares are offered to
the public the company will indicate how and when they have to
pay the money. Usually the company will not demand full payment
at the time of issue itself. Instead, the capital is collected
part by part at application stage, allotment stage, first call
stage etc. Called up capital is the portion of subscribed
capital which is actually demanded by the company.
When company calls up
capital some shareholders may fail to pay. This amount is called
calls in arrears. The amount paid by the shareholders is known
as paid up capital.
Reserve capital is the
part of the uncalled capital set aside as reserve, by the
company to call up only in the event of liquidation of the
company.
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