Class XII: Accounting for Share Capital

Chapter-7

Accounting for Share Capital

Ø    Definition of a Company

“Company means a company incorporated under this Act or any previous Company Law”                                                                        (Section 2 (20) of the Companies Act 2013)

“A company is an artificial person created by law, having separate entity with a perpetual succession and a common seal.”                                                              (Prof. Haney)

A company may be One Person Company, a Private Company or a Public Company

Ø    Characteristics of a Company

1)                  Incorporation     

2)                  Separate Legal Entity

3)                  Perpetual Existence

4)                  Limited Liability

5)                  Transferability of Shares

6)                  Management and Ownership Separate

7)                  Common Seal

Ø    TTypes of Companies

                                    Companies are of three types:

                                    (i)         One Person Company

                                    (ii)        Private Company

(iii)       Public Company

Ø    One Person Company

One Person Company is a company which has only one person as a member. Rule 3 of the Companies (Incorporation) Rules 2014 provides that:

(1)        Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company or shall be a nominee for the sole member of a One Person Company

(2)        Its paid up capital is not more than  50 Lakhs

(3)        Its average annual turnover should not exceed  2 Crores.

(4)        It cannot carry out Non-Banking financial Investment activities including investment in    securities of any, body corporate.

                                                                         (Section 2 (62) of the Companies Act 2013)

Ø    Private Company

            A Private Company is one which by its Articles of Association:

            (a)        restricts the right to transfer its shares, if any.

            (b)        limits the number of its members excluding its present or past employee members to 200. Where shares are held by two or more persons jointly they shall be treated as a single member.

            (c)        prohibits any invitation to the public to subscribe for any securities of the company.

                                                                         (Section 2 (68) of the Companies Act 2013)

Ø    Public Company

            A Public Company is a company which:

            (a)        is not a private company;

            (b)        is a Private Company, being a subsidiary of a company which is not a Private Company.

                                                                        (Section 2 (71) of the Companies Act 2013)

            A company, private or public, may be

            (i)         Limited Liability Company,

            (ii)        Unlimited Liability Company, and

            (iii)       a company limited by Guarantee.

Ø    Company Limited by Shares

A company having the liability of its members limited by the memorandum to the amount, if any, unpaid on shares respectively held by them is termed as “a company limited by shares”.

                                                                                                                        (Section 2 (22) of the Companies Act 2013)

Ø    CCompany Limited by Guarantee

It is a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of it being wound up.

                                                                                                                                                        (Section 2 (21) of the Companies Act 2013)

Ø    Unlimited Liability Company

It is a company where the liability of its members is unlimited. It means, in the event of winding up, the debts of the company shall be met from private property of the members.

                                                                                                                                                        (Section 2 (92) of the Companies Act 2013)

Ø    Process of Formation of a Company

1)                  Promotion

2)                  Incorporation or Registration

3)                  Capital Subscription

4)                  Commencement of Business

Ø    Meaning of a Share

“Share means a share in the share capital of a company and includes stock.”

                                                                                                        (Section 2 (84) of the Companies Act 2013)

            The Capital of a company is divided into units of small denomination and each unit is called a Share. Each share will have a specific value called Face Value.

            There are two types of shares:

§     Preference Shares and

§     Equity Shares

Ø    Preference Share Capital

Preference Shares are the shares that carry the following two rights:

(i)         Preferential right of dividend to be paid as fixed amount or an amount calculated at a fixed rate; and

(ii)        On winding up for repayment of capital, a preferential right to be repaid the amount of capital before any amount is paid to the equity shareholders

                                                                                                        (Section 43 (b) of the Companies Act 2013)

Ø    Classes of Preference Shares

Preference Shares can be classified as follows:

1)                  With Reference to Dividend;

2)                  With Reference to Participation in Surplus Profit;

3)                  With Reference to Convertibility; and

4)                  With Reference to Redemption.

1)                  With Reference to Dividend

a)      Cumulative Preference Shares: Cumulative Preference Shares are those Preference Shares which carry the right to receive arrears of dividend before dividend is paid to the Equity Shareholders.

b)      Non-Cumulative Preference Shares: Non-Cumulative Preference Shares are those Preference Shares which do not carry the right to receive arrears of dividend.

2)                  With Reference to Participation in Surplus Profit

a)      Participating Preference Shares: The Articles of Association of a company may provide that after dividend has been paid to the Equity Shareholders, the holders of Preference Shares will also have a right to participate in the remaining profits. The Preference Shares carrying this right are called Participating Preference Shares.

b)      Non-Participating Preference Shares: Preference Shares which do not carry the right to participate in the profits remaining after Equity Shareholders have been paid dividend are Non-Participating Preference Shares.

3)                  With Reference to Convertibility

a)      Convertible Preference Shares: Convertible Preference Shares are those Preference Shares which carry a right to be converted into Equity Shares.

b)      Non-Convertible Preference Shares: Non-Convertible Preference Shares are those Preference Share which do not carry a right to be converted into Equity Shares.

4)                  With Reference to Redemption

a)      Redeemable Preference Shares: Redeemable Preference Shares are those Preference Shares which are redeemed by the company at the time specified for their repayment or earlier.

b)      Irredeemable Preference Shares: Irredeemable Preference Shares are those Preference Shares the amount of which can be returned by the company to the holders of such shares when the company is wound up.

The Companies Act, 2013 does not permit issue of Irredeemable Preference Shares.

Ø    Equity Share Capital

“Equity Share Capital, with reference to any company limited by shares, means all share capital which is not preference share capital.”

                                                                                                    (Section 43 (a) (i) of the Companies Act 2013)

            Equity shares do not enjoy any preferential rights. Thus, for the purpose of dividend and repayment of capital, the equity shares rank after the preference shares. Their rate of dividend is not fixed. It may vary from year to year depending upon the profits of the company.

Ø    Difference between Equity Share and Preference Share

Basis	Preference Shares	Equity Shares
Rate of dividend	Rate of dividend is fixed in case of preference shares	Rate of dividend is decided every year on the basis of profits earned
Right to vote	Preference Share holder do not carry the right to vote except under some special circumstances	Equity Shareholders carry the right to vote in all circumstances
Right to dividend	Dividend on Preference Shares is paid before any dividend is paid on Equity Shares	Dividend is paid only after dividend is paid on Preference Shares.
Redemption	Preference shares are redeemed after a stipulated period	Equity Shares cannot be redeemed during the life of the company

Ø    Prospectus

            “Prospectus” means any document described or issued as a prospectus and includes a     red herring prospectus referred to in section 32 or shelf prospectus referred to in       section 31 or any notice, circular, advertisement or other document inviting offers from         the public for the subscription or purchase of any securities of a body corporate.

                                                                                                        (Section 2 (70) of the Companies Act 2013)

Ø    Minimum Subscription

            No allotment of any securities of a company offered to the public for subscription shall   be made unless the amount stated in the prospectus as the minimum amount has been

            subscribed and the sums payable on application for the amount so stated have been        paid to and received by the company by cheque or other instrument.

                                                                                                                        (Section 39 (1) of the Companies Act 2013)

Ø    Sweat Equity Shares

“Sweat Equity Shares” means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property,

rights or value additions, by whatever name called;

                                                                                                                        (Section 2 (88) of the Companies Act 2013)

Ø    Disclosure of Share Capital in the Balance Sheet (as per Schedule III Part-1)

Authorised or Nominal Share Capital

“Authorised Capital” or “Nominal Capital” means such capital as is authorized by the memorandum of a company to be the maximum amount of share capital of the company.

                                                                                                         (Section 2 (8) of the Companies Act 2013)

Issued Share Capital

            “Issued Capital” means such capital as the company issues from time to time for subscription.

                                                                                                        (Section 2 (50) of the Companies Act 2013)

Subscribed Share Capital

            “Subscribed Capital” means such part of the capital which is for the time being subscribed by the members of a company.

                                                                                                        (Section 2 (86) of the Companies Act 2013)

Called-up Share Capital

             “Called-up Capital” means such part of the capital, which has been called for payment.

                                                                                                        (Section 2 (15) of the Companies Act 2013)

Paid-up Share Capital

“Paid-up Share Capital” or “Share Capital Paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called.

                                                                                                        (Section 2 (15) of the Companies Act 2013)

Balance Sheet of ………Ltd.

As at ……………………………..

	Particulars	Note No.	Current Year Amount	Previous Year Amount
I	EQUITY AND LIABILITIES Shareholder Funds: (a)        Share Capital	1	xxxx	xxxx

            Note No. 1

1	Share Capital	Amount
	Authorised ………….. Shares of  ….. each
	Issued ………….. Shares of  ….. each
	Subscribed Subscribed and fully paid ………….. Shares of  ….. each, fully called and paid Subscribed but not fully paid ………….. Shares of  ….. each, ….called Less: Calls-in-arrear (if any)

 

Ø    Conditions of issue of Shares

I           Issue of shares for cash at par

§     Amount payable in lump-sum

Date	Particulars	Debit ()	Credit ()
On receipt of application money
	Bank A/c                                                          Dr.             To Share Application & Allotment A/c
On allotment of shares
	Share Application & Allotment A/c                Dr.             To Share Capital A/c

§     Amount payable in instalments

Date	Particulars	Debit ()	Credit ()
1)                  On receipt of application money
	Bank A/c                                                          Dr.             To Share Application A/c
2)                  On transfer of application money to Share Capital Account
	Share Application A/c                                                 Dr.             To Share Capital A/c
3)                  Amount due on allotment
	Share Allotment A/c                                       Dr.             To Share Capital A/c
4)                  On receipt of allotment money
	Bank A/c                                                          Dr.             To Share Allotment A/c
5)                  Amount due on ….Call money
	Share ….Call A/c                                             Dr.             To Share Capital A/c
6)                  On receipt of …..Call money
	Bank A/c                                                          Dr.             To Share ….Call A/c

II.         Issue of shares for cash at premium

§     Amount payable in lump-sum

Date	Particulars	Debit ()	Credit ()
1)                  On receipt of application money
	Bank A/c                                                          Dr.             To Share Application & Allotment A/c	(including premium)
2)                  On allotment of shares
	Share Application & Allotment A/c                Dr.             To Share Capital A/c             To Securities Premium A/c

§     Amount payable in instalments and premium money payable with allotment

Date	Particulars	Debit ()	Credit ()
1)                  Amount due on allotment
	Share Allotment A/c                                       Dr.             To Share Capital A/c             To Securities Premium A/c
2)                  On receipt of allotment money
	Bank A/c                                                          Dr.             To Share Allotment A/c	(including   premium)

§     Amount payable in Instalments and premium money payable with application

Date	Particulars	Debit ()	Credit ()
1)                  On receipt of application money
	Bank A/c                                                          Dr.             To Share Application A/c	(including premium)
2)                  On allotment of shares
	Share Application A/c                                                 Dr.             To Share Capital A/c             To Securities Premium A/c

Issue of shares for consideration other than cash

§     When assets are purchased

Date	Particulars	Debit ()	Credit ()
	Sundry Assets A/c                                            Dr.             To Vendor A/c [Agreed value of assets]

§     When business is purchased consisting of assets and liabilities and purchase consideration is not given

Date	Particulars	Debit ()	Credit ()
	Sundry Assets A/c                                            Dr.             To Sundry Liabilities A/c             To Vendor A/c [Agreed value of assets and liabilities]

§     When business is purchased consisting of assets and liabilities and purchase consideration is given

a)      If purchase consideration is more than the value of Net Assets (Assets- Liabilities]

Date	Particulars	Debit ()	Credit ()
	Sundry Assets A/c                                            Dr. Goodwill A/c (PC – NA)                                   Dr.             To Sundry Liabilities A/c             To Vendor A/c (Purchase Consideration)

b)     If Purchase Consideration is less than the value of Net Assets (Assets - Liabilities)

Date	Particulars	Debit ()	Credit ()
	Sundry Assets A/c                                            Dr.             To Sundry Liabilities A/c             To Capital Reserve A/c (NA – PC)             To Vendor A/c (Purchase Consideration)

§     When Shares are allotted against purchase consideration

a)      At par

Date	Particulars	Debit ()	Credit ()
	Vendor A/c                                                      Dr.             To Share Capital A/c

b)     At premium

Date	Particulars	Debit ()	Credit ()
	Vendor A/c                                                      Dr.             To Share Capital A/c             To Securities Premium A/c

            Calculation of number of Shares to be issued

            Number of Shares   =              Purchase Consideration         

                                                            Face Value + Premium                                  

Forfeiture and Reissue of shares, originally issued at Par

Date	Particulars			Debit ()	Credit ()
(i)	Forfeiture of Shares
	Share Capital A/c           To Share Forfeiture A/c           To Calls-in-arrear A/c	Dr.		[Called up amount]              [Paid up amount]              [Unpaid amount]
(ii)	Reissue of forfeited shares
(a)	Bank A/c Share Forfeiture A/c            To Share Capital A/c	Dr. Dr.		[Re-issue Price] [Discount on re-issue]             [Total Amount]
(b)	Share Forfeiture A/c          To Capital Reserve A/c	Dr.		[Balance of forfeited amount after reissue]

                                   

                                   

Calculation of Capital Reserve

            Capital Reserve           =          (Shares reissued × Amount forfeited) – Discount on reissue

                                                                              Shares forfeited   

Forfeiture and reissue of shares originally issued at Premium

           

            Forfeiture of Shares

(a) If premium money received
	Share Capital A/c             To Share forfeiture A/c            To Calls-in-arrear A/c	Dr	[Called up excluding premium] [Paid up excluding premium]  [Unpaid Instalments]
(b) If premium money not received
	Share Capital A/c   Securities Premium A/c          To Share Forfeiture A/c          To Calls-in-arrear A/c	Dr. Dr.	[Called up excluding premium] [Premium of Shares forfeited] [Paid up] [Unpaid including premium]

            Re-issue of forfeited shares

(a)	Bank A/c Share Forfeiture A/c              To Share Capital A/c	Dr Dr.	[Amount received on reissue] [Discount on reissue] [Total Amount]
(b)	Share Forfeiture A/c            To Capital Reserve A/c	Dr.	[Balance of forfeited amount after reissue]

Pro-rata allotment

Calculation of arrear amount on allotment

Step 1              Calculate shares applied by holder who failed to pay allotment money on the basis of shares allotted and proportion of allotment 

Step 2              Calculate amount due on allotment on the basis of shares allotted and                                          allotment money per share (Shares allotted x allotment money per share)

Step 3              Subtract from Step-2, excess application money transferred to share allotment on the basis of shares not allotted and application money per share.