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Section 2(84) of the Companies Act states that a share in a company’s capital is divided into a fixed number of equal parts. It is a percentage of ownership in a company. For instance, if the capitalization of a company is 1 lakh, and one share is priced at Rs.10, then the number of shares issued would be 10000.
Companies do their borrowing through shares. When a company earns profits it is distributed among the shareholders in the form of dividends also, they bear any losses that the company may face. Some different types of shares are right shares, bonus shares, sweat equity shares and Employee stock options plans.
Section 43 of the Companies Act provides that the shares are of two types:
- Preference Shares
- Equity shares
The Procedure for Issuing Shares in a Company
A company issue shares to raise additional capital for its business operations. Public companies require the approval of their shareholders before issuing new shares. A company first issues a prospectus, receives an application for it, and then allots shares.
Issuing Prospectus
A company invites the public to subscribe to its shares by issuing the prospectus. All the information regarding a company’s financial structure, Profit and loss statements, previous year’s balance sheet, etc., are covered in the prospectus.
Application of Shares
After the prospectus is issued, the prospective investors can then apply for shares. When the number of shares applied for is more than the number of shares issued it is called oversubscription of shares, and when the number of shares applied for is less than issued, there is an under-subscription.
Allotment of Shares
The shares are allotted after the minimum subscription is reached. Not everyone who applied for the shares receives allotment letters, the ones who aren’t allotted shares receive regret letters, and their allotment money is given back. The Allotment is done on a pro-rata basis in case of oversubscription. Share application money pending allotment is the amount a company receives for which the allotment is not yet made.
- All the amount on shares should be fully called-up within 12 months from the date of allotment.
- At least a month’s interval should be there between making the two calls. The shareholders must be given at least fourteen days’ notice to pay the amount of the call.
- The usual procedure states that the defaulting shareholder must be given 14 days’ notice to pay the unpaid amount on his shares and the interest accrued.
- Despite this notice, if the shareholder still does not pay the unpaid amount then his shares may be forfeited. The amount he already paid does not return to him and is kept by the company.
Entries for the Issue of Shares
When application money is received
Bank A/c Dr.
To Share Application A/c
(Application money received on…. Shares @ of Rs. ….. per share)
For transferring money to share capital A/c
Share Application A/c Dr.
To Share Capital A/c
(Application money on allotted share transferred to Share Capital A/c)
When allotment is made
Share Allotment A/c Dr.
To Share Capital A/c
(Amount due on the allotment on….shares @of Rs. …..per share)
Entries on First Call
- When shareholders are asked to pay the First Call
Share First Call A/c Dr.
To Share Capital A/c
(First Call due on…. Shares @ of Rs. …….per share)
- On receipt of First Call Money
Bank A/c Dr.
To Share First Call A/c
(First Call money received on…share @ of Rs. ….per share)
Entries on Second Call
- When shareholders are asked to pay the Second Call
Share Second Call A/c Dr.
To Share Capital A/c
(Second Call due on…. Shares @ of Rs. …….per share)
- On receipt of Second Call Money
Bank A/c Dr.
To Share Second Call A/c
(Second Call money received on…share @ of Rs. ….per share)
Share application money Pending Allotment
Share application money pending allotment refers to the amount that is received on the application of share, but the allotment is not made yet. The journal entries are:
For returning the money to the applicants
Share Application A/c Dr.
To Bank A/c
(Application money returned on un-allotted shares)
When excess money is adjusted towards sums due on allotment
Share Application A/c Dr.
To Share Allotment A/c
(Excess Application Money utilised for Allotment and Calls)
Calls in Arrears
When the company sends notice to the shareholders to pay allotment or call money, they are required to pay it within the specified period. If it is not paid, then the unpaid amount becomes arrears due from them. The company is allowed to charge interest on calls-in-arrears but it should not exceed 10% p.a.
The journal entries to record Calls-in-Arrears are
Calls-in-Arrears A/c Dr.
To Share Allotment A/c
(Share Allotment/Call money not received on…shares)
When the unpaid balance is paid later, then
Bank A/c Dr.
To Calls-in-Arrears A/c
(Amount due on allotment/call that was remaining unpaid is now received on…Shares)
The journal entry for the interest charged by the company on Calls-in-Arrears
Bank A/c Dr.
To Interest on Calls-in-Arrears A/c
Conclusion
A share is a part of the ownership of a company. The process by which a company allots shares to shareholders is called Issue of Shares. Shareholders receive profits in the form of dividends from the company but also are the bearers of losses faced by the company. Shares are a kind of borrowing for the company. Investors choose shares for long-term and short-term investments as they are a good source of long-term wealth generation from an investor. A person can choose from a variety of industries and sectors.
