Company Accounts

Accounting for Share Capital 2

Accounting for Share Capital

Capital of joint stock companies is referred as share capital because it is divided into shares. Share capital is usually not collected in lump sum, but in instalments at various stages, such as application, allotment, 1^st call etc. For the purpose of convenient accounting, a temporary account representing each of these stages will be opened in the ledger which will be closed once the amounts expected on that stage is fully collected or the shares are cancelled for unpaid amounts.

Following are the journal entries for issue of share capital:

Share Application Stage

The first stage in issue of share is the application stage. At this point the company will give extensive publicity to the share issue and invite the public to apply for the shares. A prospectus which is official invitation to the public, containing details of the company, proposed number of shares, its type, value etc. will be issued to the pubic and registered with the registrar of companies.

In response to the invitation by the company, public will apply for the shares. A part of the value of shares will be specified as application money which is to be paid along with the application. This amount will be deposited in the bank account of the company. Application money cannot be less than 25% of the issue price. Following journal entries are passed at the collection and capitalisation of application money.

i.. When share application money is received

Bank Account       Dr.

              To Share Application Account

ii. Application money credited to Capital Account

Share Application Account Dr.

               To Share Capital

The second entry will close the Share Application Account, and in the ledger there will be Cash at Bank on one side and Share Capital on the other, provided the number of applications invited and the number of applications received are the same.

Share Allotment Stage

After the closure of share issue the directors proceed to the allotment of shares. An additional amount towards the capital on the allotted shares is collected at this stage. This amount is called allotment money.

Following journal entries are passed at allotment stage:

i.. Allotment money credited to capital

Share Allotment Account Dr.

            To Share Capital

ii. Collection of allotment money

            Bank Account Dr.

                        To share Allotment Account

Share Call

After the share allotment, the company will collect the remaining capital in one or two additional instalments which are known as calls on shares. Same accounting entries are passed for all calls.

Following are the typical entries:

i. Call money credited to capital

Share 1^st Call Dr.

                        To Share Capital

ii. Collection of call money

            Bank Account Dr.

                        To Share 1^st Call

Illustration 4.01

ABC Ltd. invited applications for 1000 shares of Rs.10 each on 1^st January, 2002. The payments to be made as follows:

Rs.3 on application; Rs.3 on allotment; Rs.4 on 1^st call

The issue was fully subscribed and the amounts due on allotment and first call have been received. Pass necessary Journal Entries.

Journal Entries

Over-Subscription and Under-Subscription

Over-subscription

It is unlikely that the public apply for the exact number of applications invited by the company. When applications received exceed the number invited, the share is said to be over-subscribed. It also means that the company received more application money than what was originally invited. Now the company cannot conveniently increase the number of shares and keep the money as capital. Instead, it must refund the excess amount received or make a part allotment on applications adjust the excess money against future calls from shareholders.

When there is over subscription share application account will not be closed by the transfer to capital alone (second entry above). This is because the company has received more money. One of the following entries will be passed to close the share application account depending on the treatment of money.

i. If the excess amount is refunded to applicants

            Share Application Account Dr.

                        To Bank

ii. If the excess amount is adjusted to Allotment

            Share Application Account Dr.

                        To Share Allotment

Illustration 4.02

On 1^st January 2003 ABC Ltd. invited applications for 1000 shares of Rs. 10 each. The payments to be made as follows:

Rs.3 on application

Rs.3 on allotment

Rs.4 on 1^st call

Applications have been received for 1200 shares. Excess applications have been rejected. Allotments were made. The full amounts collected in due course.

Pass necessary Journal Entries to record the above.

(Note: This illustrates the treatment of oversubscription. Here 1200 applications have been received on an issue of 1000 shares. Here the company has to stick to the 1000 shares issued. Compare these three simple illustrations carefully)

Journal Entries

Under-subscription

Under-subscription is a situation just the opposite of over-subscription. Here the company has received less number of applications than what was invited. In case of under subscription the company will proceed to allotment with whatever number of shares applied by the public.

Illustration 4.03

On 1^st January 2003 ABC Ltd. invited applications for 1000 shares of Rs. 10 each. The payments to be made as follows:

Rs.3 on application; Rs.4 on allotment; Rs.3 on 1^st call

Applications have been received for 900 shares. Allotments were made. The full amounts collected in due course.

Pass necessary Journal Entries to record the above.

Journal Entries