Accounting for Share Capital

A company is a legal person who cannot be seen and only exists in the eyes of the law. Being a mere creation of law, it only has the properties that the charter of its creation bestows upon it, either explicitly or implicitly, as a result of its very existence. 

A company’s capital is usually raised through the sale of shares (also known as share capital) and debentures (debt capital). This chapter explains how to account for a company’s share capital.

The Share Capital of a Company

A company, as a non-existent person, is unable to generate its capital, which must be obtained from a variety of sources. These individuals are referred to as shareholders, and the amount they contribute is referred to as share capital. 

Because the number of shareholders is high, creating different capital accounts for each of them is not possible. As a result, numerous pathways of capital incomes merge into a single capital account known as the ‘Share Capital Account’.

Categories of Share Capital

Authorised capital: A company’s Memorandum of Association decides how much share capital can be issued. This amount of share capital is known as authorised capital. The company cannot raise more capital than the amount specified in the Memorandum of Association. It is also known as nominal capital or registered capital.

Issued capital: Issued capital is the amount of the authorised capital issued to the public for subscription as per the Memorandum, as well as the shares issued to vendors and signatories. Unissued capital is authorised capital that is not available for public subscriptions. However, at a later date, unissued capital may be made available for public subscription.

Called-up capital: This is the portion of the subscribed capital that has been called upon the shares, i.e., the amount that the company has requested from the shareholders.

Paid-up capital: It refers to the portion of the called-up capital that has been received from shareholders. When all the called amounts have been paid, the called up capital equals the paid-up capital. ‘Calls in arrears’ refers to an amount that has not been paid on calls by one of the shareholders. As a result, called-up capital minus call in arrears equals paid-up capital.

Uncalled capital: This is the amount of subscribed capital that is yet to be called up.

Reserve capital: A company may set aside a portion of its uncalled capital to be called only if the corporation is liquidated. The company’s uncalled amount is called reserve capital. It is only available to creditors in the event of a company’s liquidation.

Nature and Capital of Shares

The total share capital of a company is divided into units called shares. As a result, a share is a fractional part of a company’s share capital that serves as the basis for ownership. Shareholders are people who make a financial contribution in the form of stock.

There are two types of shares:

Preference shares

A preference share meets the following criteria: (a) It has a preferential right to dividends, which are paid either as a fixed amount to preference shareholders or as an amount calculated using a fixed rate of the nominal value of each share before any dividends are paid to equity shareholders. (b) It has or will have a preferential right to capital repayment before anything is paid to equity shareholders in the event of the company’s dissolution.

Equity Shares 

A non-preference share is referred to as an equity share. Equity or ordinary shares are shares that do not have a preferential right to dividends or capital repayment.

Issue of Shares

1. Issue of prospectus: The prospectus is first made available to the general public by the company. A prospectus is a public announcement that a new company has been formed and that it requires funding to operate. It includes detailed information about the company as well as the method for collecting funds from potential investors.
2. Receipt of applications: Prospective investors who want to subscribe to the company’s share capital must submit an application along with the application money and deposit it with a designated bank as specified in the prospectus when the prospectus is released to the public.
3. Allotment of shares: After completing certain other legal formalities, the company may proceed with the allotment of shares if the required minimum subscription has been received. 

Accounting Treatment for Share Capital

The journal entries for allotment of shares are as follows:

1. For the Share application money received

       Bank A/c                  Dr.

     To Share application A/c

3. For Transfer of Application Money 

          Share Application A/c                     Dr. 

         To Share Capital A/c 

(Application money on the number of shares allotted/ transferred to Share Capital)

3. For Money Refunded on Rejected Application 

          Share Application A/c                     Dr. 

          To Bank A/c

4. For Adjustment of Excess Application Money 

       Share Application A/c                       Dr. 

           To Bank A/c

5. For Receipt of Allotment Money 

               Bank A/c                                     Dr. 

            To Share Allotment A/c

Conclusion

For students, accounting for share capital is an important topic. Understanding shares and the accounting treatment for share capital is an essential part of learning accountancy. 

Capital in a company is obtained from shareholders, and the amount contributed is called share capital. Share capital is divided into different categories: authorised capital, issued capital, called-up capital, paid-up capital, uncalled capital and reserve capital. Shares are of two kinds: preference shares and equity shares. A company issues shares in three steps: issuing a prospectus, receiving applications and allotment of shares.