Accounting for Share Capital

Company: features and types

A company is an artificial person created by law, with a separate legal entity, perpetual succession, limited liability, a common seal (optional now) and transferable shares.

• Private company: min 2, max 200 members; restricts share transfer; cannot invite the public.
• Public company: min 7 members, no maximum; shares freely transferable.
• One Person Company: a single member.
• Also: companies limited by shares, by guarantee, unlimited companies; government companies; holding and subsidiary companies; listed companies.

Kinds of share capital

Authorised → Issued → Subscribed (fully paid / not fully paid) → Called-up → Paid-up. Reserve capital is the part of uncalled capital called only on winding up.

Equity and preference shares

Preference shares: preference for dividend at a fixed rate, and for return of capital on winding up. Types: cumulative/non-cumulative, participating/non-participating, convertible/non-convertible, redeemable (only redeemable ones can be issued in India).

Equity shares: not preference shares; dividend varies with profit; carry voting rights; bear the most risk.

Issue of shares at par and at premium

At par: issue price = face value. At premium: issue price > face value; the premium is credited to Securities Premium A/c, usually with allotment. Its uses are restricted by Section 52 (e.g. issuing fully paid bonus shares, writing off preliminary expenses, discount or premium on redemption). Shares cannot be issued at a discount except sweat equity.

Entries: Bank Dr, To Share Application; Share Application Dr, To Share Capital; Share Allotment Dr, To Share Capital, To Securities Premium; Bank Dr, To Share Allotment; Share First Call Dr, To Share Capital; Bank Dr, To Share First Call; and so on.

Over-subscription and under-subscription

Under-subscription: fewer shares applied than offered. Allot only if minimum subscription (90% of issue) is received; otherwise refund.

Over-subscription — three ways:

1. Reject some applications fully: refund.
2. Pro rata allotment: excess application money is adjusted against allotment (and calls if allowed); any balance refunded.
3. A mix of both.

Calls in arrears and calls in advance

Calls in arrears: amount called but not paid. Calls-in-Arrears A/c Dr. Shown as a deduction from subscribed capital. Table F allows interest up to 10% p.a.

Calls in advance: amount received before it is called. Bank Dr, To Calls-in-Advance A/c (a current liability until adjusted). Interest up to 12% p.a. under Table F.

Shares for non-cash consideration, private placement, ESOP and sweat equity

For assets bought: Assets Dr, To Vendor; then Vendor Dr, To Share Capital (and Securities Premium). Number of shares = amount ÷ issue price.

To promoters for their services: Incorporation costs Dr, To Share Capital.

Private placement: shares offered to a chosen small group (not the public), recorded like a cash issue.

ESOP (Employee Stock Option Plan): employees get the option to buy shares at a lower price; the discount is an employee benefit expense.

Sweat equity: shares given to employees or directors at a discount or for non-cash consideration, for know-how or value additions.

Forfeiture and reissue of shares

Forfeiture: shares cancelled for non-payment of calls. Share Capital Dr (called-up amount), Securities Premium Dr (only if premium not received), To Unpaid Calls, To Share Forfeiture (amount received excluding premium received).

Reissue: forfeited shares sold again, can be at a discount up to the forfeited amount. Bank Dr, Share Forfeiture Dr (discount), To Share Capital (and To Securities Premium if above face value). The remaining forfeiture balance on reissued shares is transferred to Capital Reserve.

Share capital in the balance sheet

In the balance sheet (Schedule III), share capital appears under Shareholders' Funds → Share Capital, with details in Notes to Accounts: Authorised, Issued, Subscribed and fully paid, Subscribed but not fully paid (less calls in arrears), plus Share Forfeiture (added). Securities Premium and Capital Reserve appear under Reserves and Surplus. Calls in advance are shown under Other Current Liabilities.

Key formulas and definitions

• Premium = Issue price − Face value (credited to Securities Premium)
• Minimum subscription = 90% of issue
• Pro rata: Excess application money = Money received − Money due on allotted shares
• Calls in arrears = Shares × unpaid call
• Forfeited amount = Amount received on those shares (excl. premium received)
• Capital reserve on reissue = Forfeited amount on reissued shares − Discount on reissue
• Shares to vendor = Purchase consideration ÷ Issue price

Worked examples

Common mistakes

• Crediting premium to Share Capital. It goes to Securities Premium.
• Debiting Securities Premium on forfeiture when premium was already received.
• Transferring the whole forfeiture balance to capital reserve when only some shares are reissued.
• Showing calls in advance as part of share capital. It is a current liability.