Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting B Com Notes | EduRev

Advanced Corporate Accounting

B Com : Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting B Com Notes | EduRev

The document Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting B Com Notes | EduRev is a part of the B Com Course Advanced Corporate Accounting.
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Accounting For Share Capital

A company is an association of persons who contribute money or money’s worth to a common stock and uses it for a common purpose. In the words of Justice James, “a company is an association of persons united for a common object”. Sec 3(1) (i) of the Companies Act 1956 defines a company as “company formed and registered underthis Act or an existing company”.

Characteristics of Company

1. Itis a voluntary association of persons
2. It has a separate legal entity
3. It has a common seal
4. It has a perpetualsuccession.

Kinds of Companies

I. On the basis of formation

1. Chartered companies – Those companies which are incorporated under a special charter by the king orsovereign such as EastIndia Company.
2. Statutory companies – These companies are formed by the special Act of legislature or parliamentlikeRBI.
3. Registered companies – Such companies are incorporated underthe Companies Act 1956 orwere registered under any previous Companies Act.

On the basis of liability

1. Limited companies‐ In these companies,the liability of eachmemberislimited to the extent of face value ofshares held by him.
2. Guarantee companies – The liability of member of such companies are limited to the amount he has undertaken to contribute to the assets of the company in the event of its windingup.
3. Unlimited Companies – In these companies,the liability ofthe membersis unlimited and members are personally liable to the creditors of the company fop making up the deficiency. Such companies are rare these days.

On the basis of public investment

1. Private Companies – These are companies by its Articles, (i) limitsthe number of members to 50,(ii)prohibitsthe invitation to the public to subscribe theirshares or debentures and (iii) restricts the transferability of their shares.
2. Public companies – These are companies otherthan private companies.

Share Capital

Total capital of the company is divided into units of small denominations; each one is called a share. According to Sec 2(46) of the Companies Act 1956, share has been defined as a share in the share capital of the company; and includes stock except where a distinction between stock and share is expressed orimplied.

Classes of Shares

A. Preference

Shares Shares which enjoy the preferentialrights asto dividend and repayment of capital in the event of winding up of the company over the equity shares are called preference shares. The holder of preference shares will get a fixed rate o dividend.

Types of preference shares

1. Cumulative preference shares – In case of these shares, the arrears of dividend are carried forward and paid out ofthe profits ofthe subsequent years.
2. Non‐cumulative preference shares – If dividend not to accumulate and not to carried forward to next year,these are called non‐cumulative preference shares.
3. Participating preference shares – In addition to a fixed dividend, balance of profit (after meeting equity dividend) shared by some preference shareholders. Such shares are participating preference shares.
4. Non‐participating preference shares – These shares get only a fixed rate of dividend. These do not getshare in the surplus profit.
5. Redeemable preference shares – If preference shares are returned after a specified period to shareholders, these preference shares e shares are called redeemable preference shares.
6. Convertible preference shares – These shares are given the right of conversion into equity shares within a specified period or at a specified date according to the terms of issue.

B. EquityShares

Equity shares are those which are not preference shares. Equity shares do not carry any preferential gain in respect of dividend or repayment of capital. So these are known as ordinary shares. There will be no fixed rate of dividend to be paid to the equity shareholders and this rate may vary from year to year. In winding up, the equity capital is repaid last.However, equity shareholder getsfull voting power

Types of share capital

1. Authorized (Registered or Nominal) Capital – It is the maximum amount of capital which the company is authorized to raise by way of public subscription.
2. Issued Capital – The part of authorized capital which is offered top the public for subscription is called issued capital.
3. Subscribed Capital – That part of the issued capital for which applications are received fromthe public is called subscribed capital.
4. Called‐up Capital – That part of subscribed capital which has been called‐up or demanded by the company is called called‐up capital.
5. Paid‐up Capital – The part of called‐up capital which is offered and actually paid by the members is known as paid‐up capital. Any unpaid amount of balance on the called‐up capital is known as unpaid capital or callsin arrears.
6. Reserve Capital – It is that portion of the uncalled capital which is called‐up only at the event of company’s winding up.

Difference between equity shares and preference shares

Equity shares Preference shares
1. Itis an ownership security 1. It is a hybrid security
2. Dividend rate is notfixed 2. Dividend rate isfixed
3. Capital isrepaid only inwinding up 3. Capital isrepaid after a stipulated period
4. These shares have voting rights 4. These shares generally do not have votingrights
5. Face value islower 5. Face value is higher


Issue of Share Capital

The shares can be issued either at par, premium or at discount. Shares are said to be issued at par when a shareholder is required to pay the face value of the shares to the company. Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. For example, a company issues the shares having the face value of Rs.10 at Rs.10; it is the issue at par. If it is issued at Rs. 12, the issue is at premium. If it isissued at Rs.8, the issue is at discount.

The issue price of the shares can be received in one instalment or it can be received in different instalments. If the issue is in different instalments, it may be paid on application, allotment and on one or more calls. The amount on application is called application money, the amount dues on allotment is called allotment money and the rest amount is called call money. As per SEBI guidelines the application money on issue must not be less than 25% of issue price (as per Cos Act, it is 5%).

Allotment of shares

Allotment of shares means the acceptance of offer of the applicant for the purchase of shares. Directors have the discretionary power to reject or accept the applications. But the public company cannot allot its shares unless the minimum subscription has been subscribed by the public and the amount of application has been received. After the allotment of shares to the applicants who will become the shareholders ofthe company.

Journal Entries for Share Issue

Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting B Com Notes | EduRev

Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting B Com Notes | EduRev

(Note: similar entries may be passed for second call, third call, if any.)

Issue of shares at premium

Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. The excess amount received over the face value is called share premium. It is a capital receipt. The share premium shall be transferred to “Securities Premium A/c”. It should be shown on the liability side of balance sheet under the head “Reserves and Surplus”.

Journal entries:

Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting B Com Notes | EduRev

Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting B Com Notes | EduRev

Issue of shares at discount

Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. Discount on issue of shares is a capital loss and it should be debited to a separate account called “Discount on issue of shares A/c”. It is shown on the assets side of balance sheet under “Miscellaneous Expenditure”. The rate of discount should not exceed 10% of nominal value of shares. Generally the discount on issue is recorded at the time of allotment. It is also noted that a newly registered company cannot issue shares at discount. The journal entry is

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