Class 12 Accountancy · Chapter 6 NotesAccounting for Share Capital
Learn about the nature and characteristics of share capital, including the issue of shares at par, premium, and discount. Understand the accounting treatment for share…
This chapter explores the nature and characteristics of share capital, focusing on how companies issue shares at par, premium, or discount. It covers the accounting treatment of share capital, including the forfeiture and reissue of shares, and the financial statement disclosure requirements. Students will learn about the different types of shares, the process of issuing shares, and the accounting entries required at each stage. The chapter also discusses the regulatory framework governing share capital and the implications of various transactions on a company's financial statements.
What you'll learn
1Understand the nature and characteristics of share capital
2Explain the process of issuing shares at par, premium, and discount
3Describe the accounting treatment for share capital transactions
4Learn the procedures for forfeiture and reissue of shares
5Prepare financial statements to reflect share capital transactions
6Analyze the regulatory framework governing share capital
Chapter at a glance
01Nature and Characteristics of Share Capital
02Issue of Shares at Par Value
03Forfeiture and Reissue of Shares
04Accounting Treatment and Financial Statement Disclosure
Detailed chapter notes
01
Nature and Characteristics of Share Capital
Share capital is the primary source of funding for a company, representing the total amount of money raised by issuing shares to shareholders. It is classified into different categories such as authorised capital, issued capital, subscribed capital, called-up capital, and paid-up capital. Authorised capital is the maximum amount a company can raise as specified in its Memorandum of Association. Issued capital is the portion of authorised capital that has been offered to the public for subscription. Subscribed capital is the part of issued capital that has been applied for by potential shareholders. Called-up capital is the amount called from shareholders to pay on the shares they hold, while paid-up capital is the amount actually received from shareholders.
02
Issue of Shares at Par Value
When shares are issued at par, the issue price is equal to the nominal or face value of the shares. The accounting treatment involves recording the application money received, transferring it to the share capital account, and making entries for the allotment and calls. The journal entries ensure that the share capital account is correctly credited with the amount received from shareholders.
03
Issue of Shares at Premium and Discount
Shares can be issued at a premium, which is an amount higher than the nominal value, or at a discount, which is an amount lower than the nominal value. When shares are issued at a premium, the excess amount is credited to the Securities Premium Reserve Account. This account is shown under the title 'Equity and Liabilities' in the company's balance sheet. The use of the securities premium is regulated by the Companies Act, 2013, and can be utilised for specific purposes such as issuing bonus shares, writing off preliminary expenses, or paying premium on redemption of preference shares.
04
Forfeiture and Reissue of Shares
Forfeiture of shares occurs when shareholders fail to pay the amount due on allotment or calls. The company can forfeit the shares and treat the amount already received as forfeited. The accounting treatment involves reversing the entries related to the forfeited shares and crediting the Share Forfeiture Account. Forfeited shares can be reissued at par, premium, or discount. The amount received from the reissue is credited to the Share Capital Account, and any excess is credited to the Share Forfeiture Account. The balance in the Share Forfeiture Account is transferred to the Capital Reserve Account, representing the profit on the reissue of shares.
05
Accounting Treatment and Financial Statement Disclosure
The accounting treatment of share capital transactions involves recording the application money, allotment money, and call money received from shareholders. The journal entries ensure that the share capital account is correctly credited with the amount received. The financial statement disclosure requirements mandate that the share capital and related reserves be shown under the title 'Equity and Liabilities' in the company's balance sheet. The balance sheet should also disclose the authorised capital, issued capital, subscribed capital, called-up capital, and paid-up capital. The Securities Premium Reserve Account and the Capital Reserve Account are also disclosed in the balance sheet.
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Which of the following is NOT a characteristic of a company as per the provided text?
ASeparate legal entity
BLimited liability of members
CPerpetual succession
DUnlimited liability of members
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Answer: (D) Unlimited liability of members
A company has limited liability for its members, not unlimited, as per the features described in the chapter.
Question 02
When shares are issued at par, the issue price of the shares is:
AGreater than the nominal value
BLess than the nominal value
CEqual to the nominal value
DEqual to the market value
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Answer: (C) Equal to the nominal value
Shares are issued at par when their issue price is exactly equal to their nominal (face) value.
Question 03
When shares are issued at a premium, the premium amount is credited to which account?
AShare Capital Account
BSecurities Premium Reserve Account
CGeneral Reserve Account
DProfit and Loss Account
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Answer: (B) Securities Premium Reserve Account
According to the chapter, the premium amount is credited to a separate account called 'Securities Premium Reserve Account'.
Question 04
When shares are forfeited, which account is debited with the called-up amount?
AShare Forfeiture Account
BShare Capital Account
CCalls in Arrears Account
DSecurities Premium Reserve Account
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Answer: (B) Share Capital Account
As per the chapter, on forfeiture of shares, Share Capital Account is debited with the called-up amount, and the unpaid calls are credited along with the amount received to Share Forfeiture Account.
Question 05
The maximum amount of share capital that a company is authorised to issue is called:
AIssued capital
BSubscribed capital
CAuthorised capital
DPaid-up capital
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Answer: (C) Authorised capital
Authorised capital is the amount stated in the Memorandum of Association that the company is authorised to issue.
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Q1. Define 'Authorised Capital' and distinguish it from 'Issued Capital'.
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Model answer
Authorised Capital is the maximum amount of share capital that a company is authorised to issue by its Memorandum of Association. It is also called Nominal or Registered capital. Issued Capital is that part of the authorised capital which is actually issued to the public for subscription, including shares allotted to vendors and signatories to the memorandum. The company cannot issue more than the authorised capital, but it may issue less.
Sample question3 marks
Q2. What is meant by 'issue of shares at par'? Give an example.
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Model answer
When shares are issued at a price exactly equal to their nominal (face) value, it is called issue of shares at par. For example, if a share of Rs. 10 is issued for Rs. 10, it is issued at par. In such a case, the entire amount received is credited to Share Capital Account.
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Q3. What is meant by issue of shares at a premium? State the accounting treatment for the premium amount received on the issue of shares.
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Model answer
When shares are issued at an amount more than their nominal (face) value, it is called issue of shares at a premium. The excess amount is credited to a separate account called 'Securities Premium Reserve Account' (or 'Securities Premium Account'). The premium can be called with application, allotment, or calls. The journal entry is: Bank A/c Dr. (or Share Application/Allotment/Call A/c Dr.) To Share Capital A/c (nominal value) To Securities Premium Reserve A/c (premium amount). The Securities Premium Reserve is shown under 'Reserves and Surpluses' in the balance sheet and can be used only for specified purposes like issuing bonus shares, writing off preliminary expenses, etc.
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Q4. A company forfeited 200 equity shares of Rs. 10 each issued at a premium of Rs. 2 per share, on which the allotment money of Rs. 5 per share (including premium) and the first and final call of Rs. 3 per share were not received. Give the journal entry for the forfeiture of these shares.
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Model answer
Share Capital A/c Dr. 2,000 Securities Premium Reserve A/c Dr. 400 To Share Allotment A/c 1,000 To Share First and Final Call A/c 600 To Share Forfeiture A/c 800 (Being 200 shares forfeited for non-payment of allotment and call money)
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Q5. State the journal entries to be passed when shares are issued at a premium and the premium amount is called with allotment money.
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Model answer
When shares are issued at a premium and the premium is called with allotment money, the following entries are passed: 1. For amount due on allotment: Share Allotment A/c Dr. To Share Capital A/c (with nominal value) To Securities Premium Reserve A/c (with premium amount). 2. For receipt of allotment money: Bank A/c Dr. To Share Allotment A/c.
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Share capital is the primary source of funding for a company, representing the total amount of money raised by issuing shares to shareholders. It is classified into different categories such as authorised capital, issued capital, subscribed capital, called-up capital, and paid-up capital.
How are shares issued at par value?
When shares are issued at par, the issue price is equal to the nominal or face value of the shares. The accounting treatment involves recording the application money received, transferring it to the share capital account, and making entries for the allotment and calls.
What happens when shares are forfeited?
Forfeiture of shares occurs when shareholders fail to pay the amount due on allotment or calls. The company can forfeit the shares and treat the amount already received as forfeited. The accounting treatment involves reversing the entries related to the forfeited shares and crediting the Share Forfeiture Account.
How are forfeited shares reissued?
Forfeited shares can be reissued at par, premium, or discount. The amount received from the reissue is credited to the Share Capital Account, and any excess is credited to the Share Forfeiture Account. The balance in the Share Forfeiture Account is transferred to the Capital Reserve Account, representing the profit on the reissue of shares.