Accounting for Share Capital Chapter Notes | Accountancy Class 12 - Commerce PDF Download

Introduction

• Company form of organization is the third stage in the evolution of forms of organization.
• Shareholders are the real owners of the company and contribute its capital.
• Shareholders elect a Board of Directors to manage the company.
• The Companies Act, 2013 governs all the affairs of the company.
• A company is considered a person, artificial, invisible, intangible, and exists only in the eyes of the law.
• Companies raise capital through shares (share capital) and debentures (debt capital).
• This chapter focuses on accounting for share capital in companies.

Features of a Company

1. Body Corporate: A company is an association of individuals who contribute money or assets towards a common purpose.
2. Separate Legal Entity: It has a separate legal entity from its members, allowing it to hold property, enter contracts, and have its own bank account.
3. Limited Liability: The liability of members is limited to the unpaid amount of shares they hold.
4. Perpetual Succession: A company has perpetual succession, meaning it continues to exist regardless of changes in membership.
5. Common Seal: Every company is required to have a common seal, which serves as its official signature.
6. Transferability of Shares: Shares of a public limited company can be freely transferred, without the need for permission or consent.
7. May Sue or be Sued: A company can sue and be sued in its own name for breaches of contract.

Kinds of Companies

1. On the basis of liability

• Companies Limited by Shares: Liability of members in Companies Limited by Shares is limited to the value of shares they hold. Full payment of shares eliminates any liability for company debts. Liability can be enforced during company existence or winding up.
• Companies Limited by Guarantee: Liability of members in Companies. Limited by Guarantee is limited to agreed contribution in event of winding up. Liability only arises in event of winding up.
• Unlimited Companies: Unlimited Companies have no limit on member liability. Creditors can claim dues from members' private property if company assets are insufficient. Unlimited Companies not commonly found in India, despite being allowed by Companies Act.

2. On the basis of the number of members

• Public Company: A public company is not a private company and not a subsidiary of a private company.
• Private Company: A private company restricts the right to transfer its shares and limits the number of members to 200, excluding employees.
• One-Person Company (OPC): An OPC is a company with only one person as a member. To form an OPC, the person must be an Indian citizen and resident, cannot engage in non-banking financial investment activities, and meet certain capital and turnover criteria.

Share Capital of a Company

A company, as an artificial person, cannot generate its own capital. Shareholders contribute to the company's capital, which is known as share capital. Due to the large number of shareholders, a common capital account called "Share Capital Account" is used. Numerous streams of capital contributions merge into this account.

Categories of Share Capital

• Authorised Capital: The first category is authorized capital, which is the maximum amount of share capital that a company is legally allowed to issue as stated in its Memorandum of Association.
• Issued Capital: The second category is issued capital, which refers to the portion of authorized capital that has actually been offered to the public for subscription, including shares allotted to vendors and signatories to the company's memorandum.
• Subscribed Capital: Subscribed capital is the part of issued capital that has been actually subscribed by the public. It may be equal to or less than the issued capital, depending on the level of subscription.
• Called-up Capital: Called up capital is the portion of subscribed capital that the company has requested shareholders to pay. It can be the full face value of the shares or a partial amount.
• Paid-up Capital: Paid up capital is the portion of called up capital that has actually been received from shareholders. It is equal to called up capital minus any outstanding payments, known as calls in arrears.\
• Uncalled Capital: Uncalled capital refers to the portion of subscribed capital that has not yet been called up by the company. It can be collected by the company whenever additional funds are needed.
• Reserve Capital: Reserve capital is a portion of uncalled capital that is set aside by the company to be called up only in the event of the company being wound up. It is available only for the benefit of creditors during the winding up process.

Shares and Classes of Shares

1. Preference shares : The shares which get preferential right in respect of :
(a) Right of dividend
(b) Repayment of capital on winding up of the company.
2. Equity shares : The shares which are not preference shares are called equity shares and do not get preference in above respect.

Distinction between Equity Share and Preference Share

(a)   With Reference to Dividend :

i.   Cumulative Preference shares : Cumulative preference shares are these preference shares, the holders of which are entitled to receive arrears of dividend before any dividend is paid on equity shares.
ii. Non-cumulative Preference shares : Non-cumulative preference shares are those preference share, the holders of which do not have the right to receive arrear of divided. If no dividend is declared in any year due to any reason. Such shareholders get nothing, nor they can claim unpaid dividend in any subsequent years.

(b) With Reference to Participation :

i. Participating preference shares : such shares, in addition to the fixed preference dividend, carry a right to participate in the surplus profit, if any, after providing dividend at a stipulated rate to equity shareholders.
ii.  Non-Participating preference shares : Such shares get only a fixed rate of dividend every year and do not have a right to participate in the surplus profit.

(c) With Reference to Convertibility

i. Convertible preference shares : are those preference shares which have the right/option to be converted into equity shares.
ii.  Non-convertible preference shares : are those preference shares which do not have the right/option to be converted into Equity shares.

(d)  With Reference to Redemption

i. Redeemable preference shares : are those preference shares the amount of which can be redeemed by the company at the time specified for their repayment or earlier.
ii.  Irredeemable preference shares : are those preference shares the amount of which cannot be refunded by the company unless the company is wound up. Now a company cannot issue irredeemable preference shares.

Some Important Terms used in Accounting for Share Capital

Note 1 : Minimum Subscription (Section 39) - It is the minimum amount stated in the prospectus that must be subscribed by the public before an allotment of any security is made.

Prospectus : It is an invitation to public for subscription of shares or debentures.

Capital : means amount invested in the business for the purpose of earning revenue. In case of company money is contributed by public and people who contributed money are called shareholders.

Share Capital : Capital raised by issue of shares is called share capital.

Authorised Capital : Also called as Nominal or registered capital. It is the maximum amount of capital a company can issue. It is stated in Memorandum of Association.

Issued Capital: This is part of authorized capital which is offered to public for subscription. It cannot exceed authorized capital.

Called Up Capital : It is the amount of nominal value of shares that has been called up by the company for payment by the subscriber towards the share.

Paid Up Capital : It is part of called up capital that the members of company or shareholders have paid.

Reserve Capital : It is part of increased capital and/or portion of uncalled share capital of an unlimited company which can be called only in case of winding up of the company.

Capital Reserve : It is capital profit not available for distribution as dividend. It is represented in balance sheet of company as Reserves and Surplus under the heading Shareholder’s Funds.

Issues of Shares At Premium : It is issue of share at more than face value.

This premium can be utilized for : (Section 52)

1. Issue of fully paid bonus shares to the shareholders.
2. Write off preliminary expenses of the company.
3. Writing off securities issue expenses commission paid discount on issue of securities.
4. For providing the premium payable on redemption of Redeemable preference shares or debentures of the company.
5. For Buy back of its own shares as per Section 68.

Journal Entries for accounting of securities premium, the securities premium may be collected by the company with application money / Allotment money / First call/Final Call depend upon the terms of issue of shares. If questions is silent regarding the securities premium amount due, it is assumed that securities premium money is due with the allotment money. Following are the various situation of securities premium received with application, allotment and call.

Journal entries for issue of shares to vendors/consideration other than cash